Is HP-Compaq <i>really</i> a bad idea?

Maybe not, writes CNET News.com's Michael Kanellos, who says the prevailing conventional wisdom about the soundness of this shotgun marriage is due for a rethinking.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
4 min read
Hewlett-Packard CEO Carly Fiorina studied medieval history at Stanford, and, luckily for her, lessons from that tumultuous period can serve to guide her through the company's proposed acquisition of Compaq Computer:

 Divided populations can be formed into thriving civilizations through hierarchical stability, fostering a common culture and, most importantly, subordinating anarchy.

 While indispensable in defending against external threats, centralized control must accommodate individual genius and private enterprise.

 Ethelred covets the land north of Humber. Allow him passage, and then smite his hovels.

A month ago, Hewlett-Packard unfurled plans to acquire longtime rival Compaq for over $25 billion. The reaction was immediate and swift. It was a misguided effort, said analysts, engineered primarily to paper over intractable challenges and ossified management. It would lead to massive layoffs, and nothing more. The winners, public opinion said, would be Dell Computer, IBM and Sun Microsystems. The value of the deal has declined by $10 billion since.

Admittedly, I initially came to the same conclusion. But call it a flash of insight--or just the sort of thing that happens when you stare at a dot on a blank wall for five minutes without blinking--but the deal now makes sense to me (bringing the grand total of supporters to three).

Why? Because they had no choice. Alone, HP and Compaq each faced an unpalatable decision: Get out of the business of selling hardware and face sudden doom, or stay in it and enjoy the lingering specter of certain death.

PCs. They are ubiquitous, disposable, imitative, anonymous, unprofitable and ultimately indispensable. Multimillion-dollar corporate contracts may involve process re-engineering consulting projects and ingenious e-commerce applications. But the deals often hinge on the ability of an IBM or an HP to air-drop 35,000 identically configured desktops, notebooks and generic Wintel servers at any given point on the globe.

Off-loading the box part of the equation would cut costs and raise profits. Unfortunately, it would also mean bringing Dell and its pesky sales force into every major account. Archeologists would wonder about the sudden explosion of "Easy as Dell" coffee mugs. As one former IBM executive burbled at a trade show cocktail party once: "PCs...They are a necessary evil."

Fiorina and Compaq's Michael Capellas, of course, have both stressed that the deal really stands as a testament about merging the consulting and high-end computing capabilities of two giants. True, but these (sporadically profitable) divisions would have a difficult time thriving independently. Compaq has 38,000 employees in its services group. Twelve thousand perform network design and high-end consulting functions. The other 26,000 work in basic support.

Sure, this sort of pedestrian reasoning tends to draw the huffy indignation of Gartner, but I prefer to think of that as an unexpected bonus.

Let's get medieval!
Personally, I think Fiorina had feudalism on the mind when the deal was conceived. The Dark Ages essentially were a confused, erratic transitional period between a shattered civilization and one that had yet to come into being. Charlemagne, covered in animal grease and tattoos, wasn't anyone's ideal candidate to revive the Holy Roman Empire, but he had an impressive battle record.

"Medieval society began as a rude arrangement," G.M. Trevelyan wrote in "A Shortened History of England." "It was an arrangement in the making of which there were elements of force and fraud...Out of these primitive arrangements of feudalism the Middle Ages built up the Europe of Dante and Chaucer; of the Cathedrals and Universities."

The computing industry finds itself wallowing in the remnants of a crumbling civilization. Customer technological sophistication has effectively commoditized nearly every product. Linux, after all, has become a credible threat to Microsoft because people aren't as afraid to veer from the prepared path. Intel cuts prices because few, if any, consumers are awed by mere megahertz.

At the same time, companies have eviscerated themselves. HP, among other large PC companies, largely exists only as a brand. Virtually all manufacturing gets outsourced, and independent research has steadily declined. While this cuts costs, it puts HP on a similar foundation as the Clapper company or the guys who make the Turbie-Twist hair towels. Their asset is a name.

Pile on top of that the fact that nearly every B-rate business school student is headed for the tech industry with delusional salary demands, and it's easy to see why the structure collapsed. Demand dropped this year, but that only sped up the inevitable.

Will a merger solve these problems? No. Both HP and Compaq executives earlier this year said it's always a mistake to buy another PC company. But what's the alternative?

"Innovation will always beat out imitation," Fiorina might have said. "So, gentlemen and ladies, I'd like to introduce HP's new line of biomass supplements."

Despite the surrounding gloom, the deal will also likely prove much easier to pull off than predicted. Compaq finds itself in the position of the acquisitionee because it badly fumbled its 1998 acquisition of Digital Equipment. It's a lesson the company won't forget.

Culturally, the transition could easily wind up smoother than expected. HP has always had an academic bent. To some at the company, the Earth revolves around the Sun, and the Sun revolves around new ink-cartridge deployment systems. Compaq employees, by contrast, tend to be more aggressive--the type of people who'd bet $50 that they could perform their own organ transplant. In other words, Carly will probably fit right in with the Houston folks, while Capellas seems like the father figure some in Palo Alto have yearned for.

Through the shotgun marriage, an empire could be born.