CNET también está disponible en español.

Ir a español

Don't show this again

Christmas Gift Guide
Tech Industry

HP-Compaq: Dumb and dumber

Tech industry veteran John Dickinson writes that the food fight between Carly Fiorina and Walter Hewlett obscures the deeper challenge to the success of the companies' proposed combination.

The way things are going with the proposed merger between Hewlett-Packard and Compaq Computer, the next thing you'll see is a supermarket tabloid headline blaring, "Fiorina punches hole in Hewlett's prize cello with high heel," with a subhead that reads, "Carly takes revenge for Walter's plot to have hairdresser make her bald."

The real thing is pretty close to that.

Carly Fiorina has launched a series of personal attacks against Walter Hewlett's fiduciary behavior, and Hewlett has retaliated, most recently by spreading rumors that the board plans to bring former HP CEO Lew Platt back when the merger fails. That assumes, of course, that the stockholders vote it down. They might or might not; all reports have it that the voting prospects are too close to call. I imagine that we'll be seeing recounts and possibly even a court case to rival the drama of 2000's presidential election.

I personally believe that putting those two companies together would be a strategic business mistake. Hewlett and his crowd of family members and concerned stockholders think so as well, although for slightly different reasons.

They and I believe that the PC business, with its low margins and falling volumes, could be a losing proposition. But while Hewlett takes the position that digital imaging is the key to the company's future, I think the company's future is wedded to its ability to invent new products. That's going to be true at least for the next few years because the economics and technology of digital photography remain unclear, and HP's position in the professional imaging business remains weak.

Fiorina believes that the PC business is viable and that what will win the day is sheer size, combined with Compaq's historic ability to innovate and build better PCs, PDAs, and so on. I'll be happy to admit that size will be a factor in the PC business, especially with the distribution channels that remain: large retail discounters for consumers and giant resellers catering to the corporate market.

A merger would create a bloated, vulnerable company anchored on the manufacture of commodity products at little or no profit.
But with PC manufacturing done offshore and components built by third parties, costs and market timing will be out of the PC companies' control, and margins will remain thin and unreliable. Dell Computer is somewhat exceptional because it has maintained control of production. Interestingly, Dell's board is reported to be finally tiring of the thin margins that come with size leadership in the PC industry.

Fiorina also touts Compaq's strengths in personal computing innovation, but that's become less of an asset than it was four or five years ago. The fact is, Compaq has not got much more to offer the merged company. Its consulting business has never been successful, nor have its forays into printers, telephones or anything else--with the exception of its recently successful line of iPaq PDAs.

HP, on the other hand, has wide-ranging research and development capabilities that have carried, and can continue to carry, the company far beyond the personal computing sphere into an as yet undefined digital future.

The fact is, Compaq has not got much more to offer the merged company.
A merger would create a bloated, vulnerable company anchored on the manufacture of commodity products at little or no profit. HP's research and development team would be less likely to develop new products in other areas because the company's management would be too focused on trying to survive an inevitable onslaught from Dell and the rest of the PC crowd. Any proposed new products would simply suffer from a lack of resources for development and marketing.

HP is one of the crown jewels of Silicon Valley and has always held a leadership position in the development and growth of the computer industry. But reduced to being a re-marketer of commodity products manufactured overseas--which is what the PC business has largely become--HP will lose that role. At that point, the technology industry's ability to press forward without one of its most honored leaders will be up for grabs.

Regardless of the outcome, that role has already been tarnished by this merger effort.