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Commentary: Good news for competitors

Hewlett-Packard and Compaq Computer have not made a convincing case for their proposed merger--which is, in essence, a defensive deal.

By Andrew Butler, Gartner Analyst

In Gartner's opinion, Hewlett-Packard and Compaq Computer have not made a convincing case for their proposed merger--which is, in essence, a defensive deal.

Moreover, current and prospective customers would largely have to work in the dark while they wait for the deal to be consummated, which Gartner believes is unlikely.

The two formerly great companies would likely not regain their past prominence by combining their assets. The deal would mean many overlaps in products, technologies, distributors, services, facilities and jobs. The combined HP/Compaq entity would face the challenge of creating coherent strategies for four server architectures, seven operating systems, four storage architectures and several service businesses.

The claimed annual cost savings of about $2.5 billion by 2004 amounts to only some 3 percent of the combined costs for the two companies. Gartner's assessment is that apart from conservative estimates of cost savings, the companies have failed to do a convincing job of presenting the benefits of an acquisition of this scale to justify the deal's risk. Facing unprecedented uncertainties in the market, the two companies' management teams have made a defensive move; in doing so, they themselves have added to those uncertainties.

Both companies have struggled to resolve conflicts between direct and indirect sales channels. In PCs, they would face the challenge of maintaining two brands, not to mention two businesses. One would have to go. The printer business, which still accounts for a substantial part of HP's revenue, would benefit somewhat. In services, both vendors derive most of their revenue from low-growth, hardware-support offerings. Faster-growing services such as consulting, systems integration and outsourcing would still elude them without significant investment (both internal and via acquisition).

See news story:
HP to acquire Compaq for $25 billion
While regulators and shareholders scrutinize the deal, neither company will be able to consider its future product directions except with reference to the past. Consequently, customers and prospects of the two companies should expect to have to do their IT planning with inadequate information.

In Gartner's view, the challenges bode strongly for HP and Compaq not completing the deal. If they do complete it, the companies, their customers and partners will likely experience at least two years of major uncertainties across all their business activities. This deal would likely not benefit any of them, including most customers.

fs (For a related commentary that includes HP's and Compaq's rankings in worldwide server market share, see Gartner.com.)

Entire contents, Copyright © 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.

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