UPDATE: HP details Compaq takeover, 15,000 to lose jobs

ITworld.com –

Hewlett-Packard Co. (HP) and Compaq Computer Corp. will slash a combined total of 15,000 jobs as part of the planned $25 billion merger of the two companies, officials said in a conference with analysts. Product lines also will be eliminated. Officials declined to offer any details about where the job cuts will be made or which product lines will be affected.

The combined company -- which will continue doing business as Hewlett-Packard -- will ultimately save $2.5 billion annually through operational synergies, said HP Chief Financial Officer (CFO) Robert Wayman. Wayman will remain CFO of HP after the merger.

Three-fourths of that cost savings will come from job cuts, Wayman said, with procurement savings making up the balance. In addition to the 15,000 job cuts that will be made as a result of the merger, the two vendors had previously and separately announced before the merger a total of 15,000 job cuts, said Compaq Chief Executive Officer (CEO) Michael Capellas, who will become president of the merged company. Executives declined to comment further on what business units and regions will be affected by the workforce reduction.

Capellas and HP CEO and Chairman Carly Fiorina said they do not anticipate any regulatory obstacles to the merger, which is scheduled to close in the first half of 2002. A team of lawyers has been reviewing the deal's antitrust ramifications for "many weeks now," Fiorina said; she estimated that the regulatory approvals process will take six to nine months.

Compaq and HP are anticipating revenue declines of "less than 5 percent" in 2002 and 2003 because of the merger's effects, Wayman said.

"Access devices" -- primarily PCs -- will be the combined company's largest source of revenue, accounting for 33 percent of sales. PCs and other Internet access devices, including handheld computers, currently comprise nearly half of Compaq's revenue, but just one-fifth of HP's.

With the PC sector beset by price warfare and dropping margins, HP considered getting out of that business altogether as the Compaq merger was being hashed out, Fiorina said. But HP decided against it, because it believes that PCs are still a crucial part of the "solutions bundle" for home and small business users, and also serve as an entry point to enterprises. "There is still growth and opportunity left in the PC business," she said.

Speed and simplicity will be two goals for the company's distribution efforts, Capellas said. Executives will work to clarify the company's product line and streamline the system used to move inventory through distribution channels, he said.

The company will also aim to increase its presence and cachet in the enterprise space for high-end computing products. Enterprise sales are forecasted to make up 26 percent of the merged company's revenue mix, executives said.

Services will play a key role going forward, comprising 19 percent of the company's revenue and generating $15 billion annually.

The new HP will be positioned as a leading product integrator, executives said. "The future of the industry is the ability to link best-of-breed products," Capellas declared. "Services is an absolutely golden opportunity."

Globally, a combined HP-Compaq will be one of the "truly, truly few companies that can do global services delivery," he said. "(The merger) allows us to have critical mass in virtually every geography."

The company's partnerships within the industry will be a "core competency" and a competitive advantage, he said. The merged organization will be the No. 1 partner of Microsoft Corp., Oracle Corp., SAP AG and Intel Corp., according to Capellas.

The two CEOs frequently referred to the extensive overlap in their companies' strategies. The deal grew out of a conversation between Fiorina and Capellas about HP licensing some intellectual property from Compaq, Capellas said. Both executives said that as they began discussing partnerships, the idea of bringing their companies together became increasingly attractive.

The merger will "leapfrog" HP's movement in executing the strategy it has been pursuing for the past two years, Fiorina said, emphasizing that neither company is changing its direction. She also stressed that the two companies understand and are prepared for the integration challenges facing them.

One of the most daunting tasks facing the two companies will be unifying their workforces, said one analyst.

Culturally, the two companies "aren't very much like each other," said Mark Margevicius, research analyst for Gartner Inc. He likened the consensus decision-making at HP to the "Borg mentality" of Star Trek lore. Compaq is more product focused, he said, and it shows in the way new technology is brought to market quickly.

Success will require strong leadership from Carly Fiorina, with her ability to rally the troops, Margevicius said. A window of opportunity will open up for the combined company's competitors in the jittery, confused time as the two companies shed redundancies.

While refusing to make specific predictions, Margevicius added that HP's purchase could herald more consolidation in the PC marketplace.

The Compaq merger "is going to take a long time to shake out," said Aberdeen Group Inc.'s IT Services Research Director Stephen Lane. The long-term outlook for a combined company is good, he said, owing to the organizations' large installed base and strong international positioning. In Europe and Asia, Compaq and HP are viewed as services leaders, on par with IBM Corp.'s Global Services unit and top consultancies such as Accenture Ltd. and KPMG Consulting Inc., Lane said. As the economy picks up, that international strength will bolster the new company, he said.

(George Chidi in Boston contributed to this report.)

HP, in Palo Alto, California, can be reached at +1-650-857-1501 or http://www.hp.com/. Compaq, in Houston, can be reached at +1-281-370-0670 or http://www.compaq.com/.

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