What do you get when you merge the number two computer maker in the world with the number three computer maker in the world? You get the most well kept secret since the Roswell aliens assassinated JFK on orders from the Mafia. Tech industry insiders like myself were absolutely shocked to find that Houston-based Compaq, the number two PC manufacturer behind Dell, will be acquired by Hewlett-Packard, the Palo Alto tech giant known primarily to consumers for their low cost printers. HP will give each Compaq shareholder a 60th of a share of HP stock for every one share of Compaq stock in the deal worth a record breaking $25 billion (US).

Unfortunately, this record-breaking deal is the only good example of record breaking either company has had lately. Layoffs have abounded at both HP and Compaq in recent months and both companies have seen their PC sales drop precipitously. Compaq and HP have lost much of their global PC business to Dell Computer Corporation in the past year, which now claims to be the number one supplier of servers, workstations and desktops in the world. A merger between two major players like Compaq and HP would place the new company higher on the high tech totem pole. The creation of this new company puts HP/Compaq in a new class of company similar to IBM, who makes and sells everything related to computers along with offering service and support.

Does this mean that a company like Dell, primarily a PC maker with a growing service and support division, would be outclassed by the new HP/Compaq behemoth? With Compaq making and servicing the PCs and HP providing the add-on peripherals like printers, Dell is going to find it hard to compete with that setup. Dell does not make their own printers like a new HP/Compaq company would, but Dell insiders tell me that they dropped HP printers from their product line because of:

1) Lack of proper driver support from HP for Dell PCs

2) Dell was selling more HP printers than HP was in any other sales channel

The merger is interesting, because the high tech industryÕs economic slump of late has many a CEO talking about Òconsolidation.Ó

Although high tech journalists decried the idea of consolidation as the destruction of competition in the industry, CEOs of the companies that could perform consolidations were even more skeptical. In April, HPÕs VP of their personal computer group told CNet News ÒIt is hard to find a successful example of one PC company buying another." Five months later, HP buys the second largest PC company in the world with almost no warning! Was this HPÕs plan to fake out everyone in the high tech industry with reverse psychology?

Maybe HP will be the exception to the rule, but the successful example of buying a PC company has eluded Compaq in the past.

Compaq bought Tandem and Digital Equipment a few years ago and was unable to squeeze any real profits from either acquisition.

CompaqÕs thinking for buying Tandem was to help their server business, and the Digital Equipment purchase was to help out with their PC service and support. Those purchases were the catalyst to transform Compaq into a full service computer provider in the same league as IBM (research, development, services, consulting and manufacturing), but that never happened. Now it is HPÕs turn at becoming a full service computer powerhouse with the Compaq purchase.

Compaq fills a void in Hewlett-PackardÕs business by supplying the personal computers and sales channels for those computers. HP does not make any of their Pavilion PCs seen in Best Buy or FryÕs ElectronicsÕ retail stores. With Compaq cranking out systems for HP, the retail presence for HP computers will shoot straight up the charts. Unfortunately, there is still a lot of overlap in the businesses that HP and Compaq are in. Both have high-end Unix workstation/server businesses, and both make a large chunk of their money off of corporate PC sales. There will be a lot of people losing their jobs in the next year or so during the reorganization of the new HP and most of those eliminations are going to come from the Compaq side.

What are Compaq employeeÕs thoughts on the sale of their company? One Compaq insider confided to me that he was ÒshockedÓ that this happened. ÒI canÕt believe they sprung this on us,Ó the Compaq manufacturing engineer said. ÒFor the past year weÕve been [streamlining] manufacturing around the world, putting together deals with First International Computer (a large Taiwanese OEM) and other big integrators and BOOM! I turn the TV on this morning and find out thisÉÓ Co-workers with my source at Compaq all basically said the same thing and one even offered: ÒI didnÕt expect us to be bought. If anything I expected us to buy Gateway.Ó

HP buying Compaq creates a huge technology powerhouse second only to IBM. The new HP should forget trying to compete against Dell, Gateway and even IBM. Instead, the new HP should look for new opportunities afforded to them with this consolidation. One business segment that the new HP can really excel in is the handheld side. HP and Compaq both have a real advantage in this arena because of their respective Journada and iPaq products running MicrosoftÕs Pocket PC version of Windows. The new HP can benefit from CompaqÕs experience in computer consulting and service, but only if they cultivate the oft-neglected small business segment.

The consolidation of HP and Compaq will mean a corporation with 140,000 employees in 160 countries and $88 billion in revenue ø someday. This wonÕt happen overnight and itÕs going to be a long and painful process getting there. From Wall Street analysts to the antitrust crowd (who always know whatÕs best for us stupid consumers), everyone will be looking at this consolidation closely. Many have said that such consolidation in the industry will destroy competition but not everyone. Insiders at Dell in Austin, Texas told me that they welcome the Compaq acquisition by HP. ÒIt means weÕre going from number one to number two,Ó said a Dell engineer. ÒNow we have to work a little harder to beat them again. Bring it on!Ó

Acquire, consolidate and compete. No complaining and no litigation from the former leader in the industry. Just three simple words: ÒBring it on.Ó

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