Doubly Blessed?

Integrating Hewlett-Packard and Compaq may have been the easy part. Can HP now beat Dell and IBM at their own game?

When the idea of combining Hewlett-Packard Co. and Compaq Computer Corp. first came up, HP chief financial officer Robert Wayman was skeptical. “I assumed we’d study it for two weeks and move on,” he says. “In this industry, there’s virtually no history of a good consolidating merger.”

Sixteen months after completing the $19 billion deal, Wayman is confident he and his counterpart from Compaq — Jeff J. Clarke — have helped rewrite that piece of history. For his part, Wayman has championed the deal with investors as a model of combined efficiency. Meanwhile, as a leader of the consolidation process, Clarke fashioned the model over a nine-month period, applying “the financial rigor needed to coordinate milestones and drive costs out.”

So far, that rigor has already reduced costs by $3.5 billion, or 5 percent, about $1 billion more than the goal set for 2004′s October 31 year-end. Inventory has been slashed from 48 days’ worth to 40 days, gaining some $1.2 billion in working capital. Moreover, four of HP’s five business segments were in the black in the first fiscal quarter, with the combined companies having only minimal market-share losses in a number of product lines. Says Clarke simply, “We believe this was the most thoroughly planned merger in history.”

But now comes the hard part: capitalizing on Wayman’s promise to investors that the integration will produce competitive advantages. He argues that the blending of Compaq and HP — already a profitable leader in imaging and printing — will soon put the combined entity called Hewlett-Packard in a position to beat Dell and IBM in the PC, server, and services businesses. “This combination gives us a tremendous number of levers to work with,” he says.

But whether pulling those levers will allow a beefed-up HP to actually overtake Dell and IBM as a profit machine is still an open question. Analysts such as S.G. Cowen’s Richard Chu at least give HP high marks for avoiding the integration catastrophes that naysayers predicted. Chu even thinks HP’s cost-cutting efforts, along with its strong profit base in printers, just might let the company make market-share inroads — although not without a battle. “IBM at one end of the spectrum, and Dell at the other,” he says, “are viewed by the investment community as having very defensible business models.” Nevertheless, he adds, “I can afford to say, maybe they can pull it off.”

Tampa’s Defense, Oakland’s Offense

Pulling off such a high-profile merger is a delicate proposition. And it typically results in the exit of the smaller company’s CFO. In this case, says Clarke, “I didn’t go away, because Carly [CEO Carleton S. Fiorina] and Bob [Wayman] offered me a great job: to co-lead the integration [with HP executive vice president Webb McKinney].”

Working with McKinney, Clarke first sought out some examples to follow. Positive lessons came from such mergers as NationsBank and Bank of America (for branding), Exxon-Mobil (for global scale), and Citibank-Salomon Smith Barney (for employee retention). Meanwhile, the largest negative lesson may have come from Compaq’s acquisition of Digital Equipment Corp. back in 1998.

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