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Of myths and mergers

HP CEO Carly Fiorina on why much of the commentary about the company's planned merger with Compaq has missed the point by a country mile.

Since Hewlett-Packard and Compaq Computer announced their merger, volumes have been written about the combination, much of it focused on PC market consolidation or creating scale to cut costs. But those stories, frankly, miss the point.

Steps like the one Michael Capellas and I took are based on a shared commitment to our customers, employees and shareowners to lead and drive the industry through its next inflection point--the accelerating shift toward market-unifying architectures and approaches.

Why are market-unifying standards such as Itanium, Unix/Linux, NT, open source, open APIs, and open connectivity standards so important in the context of our merger with Compaq and the future of the technology industry? Because market-unifying standards will shift the underlying economics and the basis of competition in this industry by leading to more competition, greater choice and flexibility for businesses, and better ease of use for consumers. They will also lead to more advantageous cost models for technology suppliers, which can be passed on to customers in the way of lower costs.

By combining HP and Compaq, we are committing to market-unifying, industry standards-based architectures and approaches across every level of the technology stack and across every category we compete in from infrastructure to access devices to printing and imaging.

Fundamentally, this merger is about three things:

1. It's about becoming a better, strong supplier to our customers with unmatched depth and breadth in products, solutions and services. A supplier that recognizes that the real world of business prioritizes speed and choice, flexibility, and return on investment over proprietary, inflexible, old-world approaches to technology that shackles businesses to their past and to their IT vendors.

2) It's about becoming a better, stronger ally for our partners. By combining forces and leveraging our partners more aggressively, we can accelerate the development and adoption of open, market-unifying architectures including Itanium and Linux, thereby creating new markets, new momentum, and new opportunities for our partners to innovate.

3) It's about having a clear, pragmatic view of the economics of the industry--economics that suggest that going forward, research and development and sales and marketing leverage and scale will determine market leadership.

The new HP will have more "capital effective" R&D efforts as a result of greater product and services breadth, and a better overall cost model created by increased volume and velocity. In fact, no company will have better-leveraged and more effective capital utilization in the industry than the combined HP and Compaq. This means we will be able to redirect dollars into inventing and innovating across our products and solutions, and increase our sales and marketing coverage in locations, customer accounts, and retail and commercial channels around the world.

As a result of this combination, companies whose businesses rely on vertically integrated, proprietary technology architectures--from the processor up through the software stack--will be challenged. These companies will have to fundamentally rethink their business models in the next two years as standards-based approaches gain momentum.

At the same time, companies whose current economic models are solely based on volume and velocity will not be able to gain the R&D and sales and marketing leverage to innovate and differentiate long term.

Why now? A global economic downturn and a tech recession make it precisely the time to do a merger like this one. It gives us time to complete the heavy lifting required in the months ahead so that we can indeed emerge a stronger, more focused competitor when the economy does turn around.

HP and Compaq are appropriately sober and pragmatic about what's required to integrate these two companies. Both management teams took this into account when we evaluated the logic of the merger, and we both concluded that the strategic rationale and benefits to customers, shareowners and employees outweigh the risks. We had a business plan and an integration plan done before we ever called a banker.

The Compaq management team carries near-term memories of what worked and what didn't in the Digital Equipment acquisition. And the HP management team understands the operational rigor because we successfully completed the largest spinoff in corporate history--the spinoff of Agilent.

Dispelling myths
Let me conclude by dispelling the three most common myths that surround this merger:

1) This is not predicated on PCs. It's actually all about enterprise computing and professional services. The new company will have a balanced overall portfolio with scale, scope, breadth and depth across a range of product categories--and an unmatched ability to service and support customers with more than 68,000 experts in configuring, optimizing, managing and maintaining IT infrastructure.

2) The merger does not signal any change in the importance of imaging and printing systems to HP. HP remains convinced that having an imaging and printing franchise and a computing systems franchise will continue to be a competitive differentiator, particularly as the physical and digital worlds become even more intertwined.

3) This is not a defensive move. It's an offensive move. It's about leading, not following. It's about becoming a better, stronger supplier to customers. It's about becoming a better, stronger ally for our partners. It's about generating greater R&D and sales and marketing leverage.

We intend to reshape the economic structure of the industry and to force our competitors to respond.