Together at Last

After eight months of wrangling, Compaq and Hewlett-Packard have joined forces. What does the motherboard of all mergers mean for Texas?

June 2002By Comments

The computer industry’s largest merger ever, between the storied Silicon Valley pioneer Hewlett-Packard and Houston’s twenty-year-old Compaq Computer, is turning out to look a lot like the marriage of an aging billionaire and a much younger bride with some very attractive attributes (do J. Howard Marshall and Anna Nicole Smith spring to mind?). The family heirs tried to stop the nuptials—Walter Hewlett, the son of company founder William Hewlett, fought the merger tooth and nail in a bitter proxy fight and unsuccessfully challenged it in court, and the Packard family’s foundation also opposed the union—but love, or rather lust for future profits, prevailed. The companies planned to consummate their $23 billion deal on May 7, and afterward, Compaq would take the name of its betrothed. The combined company would be called Hewlett-Packard.

Will Hewlett-Packard and Compaq live happily ever after? The union of the second- and third-largest U.S. computer companies, respectively (only IBM is bigger), certainly looks promising on paper. To hear the CEOs tell it, Hewlett-Packard and Compaq badly needed each other to survive in an industry in which hot products don’t matter as much as the size and the ability of a company to package services into customized solutions for business. Both companies were stumbling competitively and slashing their workforces before announcing the merger last September. Compaq had one of its toughest years ever in 2001, losing $785 million. But together the computer makers will have $87 billion in revenues and an annual potential cost savings of $2.5 billion. Michael Capellas, the tech veteran who has been Compaq’s CEO since 1999 and led it through a difficult restructuring, said the deal creates “greater opportunities to grow our business.” Carleton “Carly” Fiorina, the Hewlett-Packard chief executive who put her career on the line to champion the merger, said that Compaq will double the new company’s PC sales force and give it leading positions in servers, computer storage systems, and the kinds of expensive high-performance computers used by the military and the world’s largest stock exchanges.

The spoiler in this scenario could be a guy named Michael Dell. Capellas and Fiorina are suiting up for battle with Dell’s namesake computer maker in Round Rock, as well as IBM. According to market-research firm Gartner Dataquest, Dell’s worldwide PC shipments grew more than 18 percent last year, while everyone else lost ground. That was enough for Dell to topple Compaq as the world’s number one PC vendor. Dell is also now applying its low-cost strategy to servers, a market that Compaq dominates, and is pushing into the corporate side of computing, where Compaq is well established.

In the debate about whether the merger is good for Hewlett-Packard or for Compaq, though, one question hasn’t been answered: Is it good for Texas? Here are a few things to consider.

Doesn’t the merger mean fewer choices for consumers? I take the side of the old argument that megamergers often translate into less competition in the marketplace. The five major players in the U.S. PC business—Dell, Compaq, Hewlett-Packard, Gateway, and IBM—will become the Final Four. Compaq and Hewlett-Packard will have a formidable combined share of 22.5 percent of the nation’s PC market, placing it behind Dell’s 24.5 percent. Consumers probably won’t see higher prices for PCs, though, because Dell sells directly to customers rather than through retail channels, which keeps its costs low and puts price pressure on the market.

Capellas takes the broad view that the merged company will be able to offer customers more, not less. The new Hewlett-Packard will provide a wider range of choices under its umbrella than anyone else, he maintains, and with less confusion. “There will be no other technology company—not IBM, not Dell—that will be able to offer customers what the new HP will,” Capellas wrote in an e-mail interview. Still, when Texas consumers walk into a retail store after the merger takes effect, they’ll have one less choice when it comes to PCs.

Won’t more people lose jobs? Fiorina calls the deal “a merger of consolidation, not diversification.” And everyone knows what consolidation means: layoffs. Compaq has already laid off 8,500 workers from its roster of 71,300 employees worldwide. The merger intends to wring more cost savings partly by cutting the combined company’s workforce by 15,000 jobs. Where else the ax will fall has yet to be determined, but speculation is that Compaq, as the aquired instead of the acquirer, will likely get the brunt. Compaq employs about 10,000 people in Houston and an additional 1,100 in Austin, Dallas, Plano, and San Antonio.

Capellas looked to the long term, arguing that the combined company will be in a stronger position to compete and succeed in key market areas. That means the merged company could eventually create more jobs in Houston. And Fiorina has hinted that Hewlett-Packard might transfer people from its pricey Silicon Valley digs to less expensive office space in Houston. Some people involved in the high-tech industry in Houston say the long-term payoffs could outweigh the short-term layoffs during the transition. “Five years from now, you could see more people employed there because of the merger than you would have without,” said Paul Frison, the president and chief executive of the nonprofit Houston Technology Center, which has a new computer lab courtesy of Compaq.

Isn’t this another blow to Houston? Houston has had a rough time lately—a devastating flood; layoffs at one of its largest employers, Continental Airlines; the Enron debacle; and the planned acquisitions of several other big companies, including Pennzoil. That means tough times for the rank and file. Unemployment in Houston hit 6.5 percent in January, the highest rate in almost three years, and in February it fell only slightly, to 6.2 percent.

Houston business leaders are putting the best possible face on the merger, but the bottom line is that the city stands to lose something intangible but highly valuable: bragging rights as the home of one of the world’s best-known computer companies. Compaq has had such a visible presence in the city and the tech industry that it did a lot to change outside perceptions that Houston was just a one-trick pony, an oil-and-gas town. “Compaq has been the first name we put out when we try to sell Houston,” said Jim Kollaer, the president and chief executive of the Greater Houston Partnership, a leading business organization that studies issues like public policy development, transportation infrastructure, and workforce education. Compaq’s name is splashed on buildings all over the city, including the high-profile Compaq Center. The company is a corporate sponsor of events like the Compaq Marathon and teams like the Houston Rockets. What happens to its role as a prime corporate giver? “Compaq has always been a good corporate citizen, committed to Houston. That won’t change,” Capellas vowed. He added that Hewlett-Packard is well known for its support of the communities in which it has operations. “In that sense, the merger is a perfect cultural fit,” he said.

Won’t Compaq lose its identity? Next to Texas Instruments, no high-tech company in Texas had a higher profile before Dell came along. Compaq was born at a House of Pies in Houston, in 1982, as three former Texas Instruments employees—Rod Canion, Jim Harris, and Bill Murto—sketched an idea on a place mat for a portable IBM-PC clone. In the same way that Apple Computer co-founders Stephen Wozniak and Steven Jobs became symbols of California’s Silicon Valley, Compaq’s co-founders came to represent what was possible on the Silicon Prairie. At a time when Texas’ economy was shifting from one dominated by oil and gas to one tied more to services and technology, Compaq was a pioneer in the New Economy before most people realized there was a new economy.

After the merger with Hewlett-Packard was announced, I heard many people say that it would be a shame for Compaq’s corporate identity to disappear. Capellas said that won’t happen. “The naming of the company is one thing; driving the value of the Compaq brand name is another,” he said. “We will, in fact, leverage the Compaq brand name as we roll out different product sets… . You will see the Compaq brand used quite fully in the new company.”

Aren’t you aiding the enemy? None other than Jack Welch, the former General Electric chairman and business guru, warned Fiorina about that possibility. “Your competitors want this deal to go through,” he told her during an interview on CNBC. “It will create chaos. They will clean both your clocks while you’re doing all this.” Indeed, Dell executives said they are picking up some business because of the uncertainty created by the merger plans, especially in providing packaged solutions to corporations, where Dell hasn’t had as large a presence as Hewlett-Packard, Compaq, and IBM. Dell hopes to double its revenues over the next four or five years to $60 billion, and to do that it must get a strong foothold in the corporate world. And corporations are listening to what Dell has to say. “More and more doors are opening up to us,” Kevin Rollins, Dell’s president, recently told Wall Street analysts.

Capellas, though, said Compaq and Hewlett-Packard never “took their eyes off the ball” while the merger was going through the long approval process. “We are striving to make this merger transparent and seamless for our customers,” Capellas argued. “That is very bad news for our competitors who have been saying we’ll be distracted.” He pointed out that since last September, Compaq has signed $900 million in data-storage contracts with clients like Dollar Rent A Car and Harlingen’s Valley Baptist Health System.

Okay, time to tally up the columns of wins and losses and see if the merger is a deal or a dud for Texas. I can appreciate the cold, hard business sense of putting Compaq and Hewlett-Packard together, but I personally don’t like the idea. The odds of combining two companies with different corporate cultures seem too great to gamble with the livelihoods of thousands of people and a company that has been one of the stalwarts of the Texas tech industry. Call me sentimental, but the deal makes me a little sad. Part of my ambivalence about the merger lies with the fact that I wrote about Compaq when it was a feisty young start-up that bet everything on a new idea. It was an exciting time, years before PCs became a commodity business and Compaq became a big corporation gobbling up companies like Digital Equipment and Tandem Computers before it, in turn, got gobbled by a bigger fish.

I dug into a box recently and pulled out several yellowed newspaper clippings about Compaq with my byline. They seem almost quaint now—one was about a “high-end” Compaq computer unveiled in 1984 with 640 kilobytes of memory. Today, of course, memory is measured in megabytes or more. As I put the articles back in the box and closed the lid, I felt a bit like I was closing a chapter in Texas’ business history. And when the next chapter is written, I wonder where Compaq—er, Hewlett-Packard—will stand.

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