Changing Competitive Landscape

$25 billion merger focuses on the future. But the immediate interest is the local impact on product lines, branding, and the customer-facing organisation. However, further acquisitions may be necessary for ‘new’ HP to compete with IBM.

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By  Greg Wilson Published  October 4, 2001

Regional views|~||~||~|For the time being, “competition as usual,” appears all Hewlett-Packard is willing to say about its $25 billion dollar acquisition of Compaq. The biggest ever tech-sector deal creates an $87.4 billion computing colossus to rival IBM and significantly redraws the computing landscape — assuming the deal steers clear of any regulatory action both in the US or Europe.

Before ‘new HP’ makes an appearance sometime in 2004, the heavyweight contender has to give definition to the current muddle of products, technologies, distributors, services, facilities and jobs brought about by the merger. The combined HP/Compaq faces the challenge of creating coherent strategies for four server architectures, seven operating systems, four storage architectures and several service businesses. It’s clear that if the organisation is to achieve its target of $2.5 billion cost savings by 2004, brands and products are going to have to be culled, resulting in redundancies among the 145,000 work force. Early estimates predict the HP-Compaq marriage will cost 15,000 jobs over the next two years.

The local impact of prospective job cuts will remain unknown for the foreseeable future, with both local offices unable to go into details. For the next six-to-12 months there will be no détente, as both vendors continue to operate as separate entities. “Only then, does a period of 18-to-24 months start, which is where they have to crash together these two planets and try and create one huge one,” says Andrew Butler, vice president, Unix & midrange servers, Gartner Group.

“We see an early amount of discord in the ability to have an effective channel strategy, direct selling strategy, and generally getting out there and starting to push products effectively,” predicts the analyst.

How the merger ‘comes together’ at the local level is topping the list of questions for those businesses with a vested interest in Compaq or HP. Product overlap and staff cuts will affect existing vendor/end user partnerships in the region. “How the new company takes shape at a regional level is the biggest concern,” says an IT manager with a large Dubai-based international corporation and a Compaq end user. “Compaq & HP today have functions which duplicate each other and will be rationalised. We have working relationships that have been built up over time, processes we are familiar with and products that we have used for some time. Radical changes in any of these areas may be to our detriment,” he adds.

The reactions from HP-UX Unix users in the region, were more upbeat, looking forward to a new HP that is more capable of competing in the Win 2000 server space. “Compaq [will] help HP in two key areas to improve their strength, firstly in the area of mid-sized LAN/SQL servers — the Compaq ProLiant series servers are very popular. Secondly, in the desktop area,” says Mohammed Shah, vice president of Royah Company, a Saudi-based services organisation.

Another HP-UX user, Amr Taher, IT manager, with Saudi Binladin Group, operations & maintenance division, voiced similar optimism, saying “HP has always been weak with [wintel] servers, and that is one area we would like to see strengthened.”

Saudi Binladin Group’s O&M operation currently runs UX servers to host its Oracle 11i applications and a flood of Dell Windows 2000 servers to support its branch offices and Windows environment. “Hopefully the heightened competition in this space will mean an improvement in quality servers… that will be a key benefit.”
With the overlaps evident in numerous areas of the business, it’s not immediately obvious why HP and Compaq have decided to get hitched.

The motivation has been supplied by the combined competitive squeeze — Dell in the PC space, Sun Microsystems in the Unix server market and IBM from services, software and server segment — that has put both vendors under pressure. The basic driver behind the deal is obvious, says a Meta Group report. The deal transforms two companies with lacklustre results in the PC and server markets into a “larger competitor that can leverage massive resources and a substantial customer base.”
The merger combines the shared wintel vision, which both vendors have swung behind as Intel ramps up its IA-64 platform during the year.

There is also no denying the financial aspect of the entire deal — both vendors had suffered throughout the year. “HP and Compaq are going to great pains to say that this is a positive move, not a reactive one,” says Butler. “But we would still say that virtually all the reasons and the objectives that have been set out are financial ones — we will save all this money, we will get rid of all these people, we will save money on R&D, we will become lean, mean and ultra efficient,” explains the Gartner analyst.

The fact HP was in a position to execute the acquisition illustrates the impact of the recent US economic downturn. Only two years ago vendors like HP and Compaq were “impervious to any kind of takeover,” says Butler. “Suddenly they were vulnerable… this is a very chilling scenario,” he adds.

Strategically, the HP/Compaq deal is designed to protect both vendors from potential hostile takeover, while consigning rivals such as Sun and Dell to niche market positions. “What they are trying to make here is the next IBM,” comments Butler.

Although without doubt the deal of September 3rd created a computing heavyweight, there is a lot of training to be done if a combined HP/Compaq can move in unison around the ring, let alone deliver the same ‘across the board’ product punch.

||**||Losses for gains?|~||~||~|Initially, the $87.4 billion HP/Compaq contender is going to lose both business and revenue, as consolidation reduces each vendor’s revenues significantly. Also the interim period between now and the emergence of a leaner HP/Compaq — in around two years time — is likely to benefit rivals in nearly all areas of the business, from PCs to servers.

The newly installed management team has already predicted a 5% reduction in business during the initial two years of the merger. However, Gartner Group figures put this at around 10%.

“If HP over the next two to three years, can maintain revenue [within] 10% or less, we think that will represent a good merger situation,” predicts Butler.

Meta Group statistics indicate HP/Compaq could expect a “significant” 10-to-15% of customers to slip as rivals, particularly Dell and IBM, move to capitalise on the market. New HP’s financial rationale being that the savings generated by a consolidated HP/Compaq will make up for the loss of earnings due to the restructuring of product lines and operations.

However, the deal is not about immediate losses or gains it’s “about the step in the right direction, in terms of survival and emerging from a bear market in tact… they are looking towards 2004/05 and what they have to do now in order to be viable,” explains Butler.

A full product picture going forward isn’t really going to be likely until 2003. Until that point it’s unclear which brands or product lines will survive. Regardless of HP’s senior partnership in the merger, it’s widely believed many Compaq brands will be retained, particularly in the PDA and mid-server market. “The change in branding will be a huge challenge,” said the Dubai-based corporate IT manager. “My experience is that Compaq has a ‘better brand’ than HP in desktops, laptops and Intel-based Servers. A change in branding to HP — even with the same product names — will be difficult,” he adds.

If combining Intel PC and server product lines wasn’t challenging enough, HP/Compaq also have respected Unix server businesses. Although both vendors are committed to the wintel roadmap, there is still a huge high-margin installed based of HP-UX and Compaq Tru64 that neither vendor can afford to leave high and dry.

However, in the long term it’s likely HP-UX, which has the larger market share and ISV support, will prevail. Either way HP/Compaq has little choice but to develop watertight migration strategies for its installed base, or face losing business to the likes of IBM or Sun.

“The fact is that if you have a data centre full of Alpha kit there is nothing that says ‘stop making future purchases.’ Where it will become more difficult is [in winning] green-field businesses,” explains Butler.

If the consolidation of the two vendor’s Unix server strategies promises to be expensive, then so does another highly profitable area — storage. In the past HP and Compaq have made opposing strategic investments in backup technologies, which will lead to “key incompatibilities,” which need to be ironed out for a comprehensive storage strategy to operate. According to Butler, it’s likely that the StorageWorks brand will survive to emerge as the preferred platform for the mid-to-high-end storage space. However, with the recent strategic alliance between Sun and Hitachi, the future of HP’s high storage, based on HDS systems remains clouded.

Despite exchanging $25 billion of HP shares to acquire Compaq, it’s questionable whether Carly Fiorina, CEO and chairman of the HP/Compaq entity, has achieved computing superpower status. Certainly, new HP has revenues and critical mass, however, its services and software story is still weak in comparison with IBM. And as IBM, CEO Lou Gerstner, has advocated for nearly two years, both software and services are where the money is made.

Admittedly, the acquisition pushes HP/Compaq into third spot in the overall services game. However, analysts are quick to point out that new HP is no EDS or IBM Global Services. Over the last 12 months both HP and Compaq have attempted and failed to beef up the business consulting aspect of their respective services portfolio. “Both [vendors] are relatively weak at the level of industry specific and application level consulting,” stated a report from Hurwitz Group. Butler added that HP/Compaq’s service capability is heavily directed to product maintenance and a “relatively low level delivery of services.”

Statistics from Hurwitz illustrate the point, with product support revenues only making up a small amount of IBM Global Services’ revenues. Whereas a combined HP/Compaq product support makes up a substantial 62%. “It has taken IBM years to broaden its service portfolio to the point where its product support revenues only represent a small portion of a highly diverse services portfolio,” stated Hurwitz Group report.

Ironically enough, the proposed acquisition between HP and PricewaterhouseCoopers (PwC) would have delivered greater business consulting expertise, adds Butler. The deal “doesn’t make these companies world renowned system integrators. The probability is that they will have to make further acquisitions in services and maybe the software area, if they really want to be the next IBM,” predicts Butler.

The biggest gap in the product portfolio of new HP is the absence of a comprehensive software story. Rivals, IBM and Sun offer more convincing software platforms than new HP.

Analysts predict it could take up as long as two and half years, before this merger could be described as a success or a failure. During the interim, the focus is on relationships at ground level between the vendors, their channel partners and customers. An immediate challenge is maintaining the ‘expertise’ within the region, particularly as both organisations have invested heavily in attracting greater headcount to the region. Compaq is thought to have built up its staff contingent to just short of 200. HP, on the other hand is thought to have a staff of approximately 100 people.

“At the local level, maintaining the best people and processes will be a huge challenge,” says the Dubai-based corporate IT manager. “It will not be easy to bring two organisations which are head-to-head rivals into one seamless organisation.”

A quick comparison of HP’s and Compaq’s local offices in the region reveals obvious areas of potential consolidation.

For example, both vendors have regional offices in Cairo and Riyadh. However, Compaq’s presence in both markets is more established.

In the last 18 months both vendors have also gone to great lengths to automate business processes with those channel partners. Just how these automated relationships will continue going forward, is unknown.||**||

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