HP integration carries on in merger limbo

The fate of the merger between HP and Compaq will be in the hands of a Delaware court this week. But the massive job of integrating the two companies continues unabated.

5 min read
The fate of the merger between Hewlett-Packard and Compaq Computer will be in the hands of a Delaware court this week, but the massive job of integrating the two companies continues unabated.

See special coverage: A Fight to the Finish HP had hoped the merger would close by April 1 and had planned to have all its integration plans ready by that point. Instead, three weeks later, the company is set to go to court and defend itself against a lawsuit from dissident director Walter Hewlett, who is asking the Delaware Chancery Court to overturn the vote by HP shareholders to approve the deal.

Although an initial tally shows that HP received the required votes from shareholders, Hewlett is asking for a recount and may challenge some of the ballots. HP has said the challenge process could take until the end of April, with the company hoping to close the deal by early May.

In the background, though, the HP integration team has plugged on. The companies have had product plans and financial targets in place for months. Now, the teams are refining existing plans and working to extend those plans three years into the future.

"We haven't slowed down," said Peter Blackmore, the Compaq executive vice president tapped to lead the enterprise systems division of the new company. "You take advantage of the extra few weeks to get ready."

The team that is privy to details of how the combined company will operate has doubled in size during the last month--from about 900 people to roughly 1,800. Those being added to the so-called clean room, where these merger details are being worked out, include specialists to handle more nitty-gritty details, such as making sure employees get new ID badges. HP is also adding managers of product lines that will not survive the merger so that they can help make transition plans.

High anxiety
Outside the clean room, anxiety remains the norm at both companies. Opponents of the deal are still simmering, while workers both for and against the deal are trying to figure out what job they will have in the combined company--if they have one at all. HP has said it will cut about 15,000 jobs once the deal is complete, part of an effort to create $2.5 billion in cost savings.

Many workers are reading the tea leaves in recently announced management decisions to sense whether their unit will survive. In many cases, HP has said it will use an "adopt and go" strategy: One company's unit will survive, while a similar unit in the other company will be eliminated.

"I've been looking for a job both within and without HP," said one HP worker who expects his division to be cut in favor of its Compaq counterpart. "Prospects look dim...The group has all but been told that there will be very few left if the merger goes through and only half if it doesn't."

HP lawsuit at a glance
Walter Hewlett, the dissident Hewlett-Packard director who has led the fight against the company's planned acquisition of Compaq Computer, is suing HP. Hewlett, whose father co-founded the company, is asking the court to throw out the results of a March 19 shareholders vote.

What is being alleged?
Hewlett has two main contentions. First, he charges that HP improperly influenced large shareowner Deutsche Bank to vote at least 17 million shares in favor of the deal. He also alleges that HP failed to disclose problems it was encountering in its integration effort.

What is at stake?
Hewlett is asking that the court throw out Deutsche Bank's votes as well as all votes cast in favor of the deal. As an alternative, Hewlett is seeking to have a new vote declared.

Where is the trial?
Delaware Chancery Court in Wilmington, a court specifically designed to handle business disputes.

When does it start?
The trial is slated to start Tuesday and run three days.

Inside the clean room, where the answers to all those questions are known, integration efforts continue. With many of the more immediate tasks squared away, the company is now working on laying out the plans for the next several years.

Contrary to its image, there is not one place that the integration team is gathering. The clean room is actually a collection of meeting rooms at various HP and Compaq locations across the globe, as well as larger "war rooms" at key locations.

For example, inside building 20 at HP's Palo Alto, Calif., headquarters is a locked fortress of integration information with timelines and merger buzzwords written on the wall. Inside, workers from both companies meet with advisers from Deloitte Consulting and other firms to plan every facet of the company's operations--from how to answer the phones to how and where the $2.5 billion in expected cost cuts will come from.

One of the toughest tasks facing the integration team is figuring out how to take all of the plans that have been made and transfer responsibility from those in the clean room to the rest of the company's staff--some of whom will be losing their jobs in short order.

"Everything they are working on needs to be thrown over the fence so the company can execute," said HP spokeswoman Andrea Bass.

Maintaining focus
The other, more immediate challenge is trying to continue to sell computers, systems and servers even as workers and customers have their eye on the merged company.

Compaq's Blackmore said in an interview with CNET News.com that he has tried to keep his company's workers focused on customers, but he admits that the drama surrounding the deal is a distraction.

"You can't stop them from reading the newspaper," Blackmore said. But he added that Compaq has tried not to be consumed by the ups and downs of the merger battle. "I think the results show we've been very successful."

Even some of those who opposed the deal say they are becoming resigned to its passage and are growing weary of the endless challenges from Hewlett.

For some, the shift in mind-set came last week, when the independent tally showed that HP won by a narrow margin, confirming what the company has been saying since shortly after the March 19 shareholder vote.

"People have felt like there have been seven months in limbo, going on eight," said a manager of an HP software unit in the San Francisco Bay Area.

The manager said he has been firmly against the deal, arguing that there has never been a successful merger in the computer industry. Nonetheless, he is ready for the deal to go through.

"If it is going to happen, let's not sit around for another few months," he said.