Cultural issues, a potential quagmire in any merger, were also addressed head-on, and early. All employees were required to participate in "fast-start workshops," which focused on team-building and governance issues within the framework of blending the HP and Compaq cultures. And the success of managers in personnel transition matters was reflected in their compensation through the balanced scorecard. The attention to cultural affairs was especially helpful given that 17,900 employees, 11 percent of the premerger total of 154,900, were laid off during the first five quarters after the merger, and 1 in every 10 remaining employees in a product-related position was moved from one product to another in the adopt-and-go realignments.
The Magic "1 and 4"
The incentive for reshuffling the deck correctly was the creation of an HP that could compete profitably across a wide range of products. Wayman says any misgivings he had about the merger dissipated after he studied the impact of the combination on the two companies' market share of major products, especially where one of the two ranked number 1 and the other languished in the pack. "We saw how we could improve our market position and our financial results," he says. "And where there was overlap, it was in areas where there was complementary strength." In industry-standard servers — those based on the Windows platform, for example — Compaq was number 1 and HP was number 4, while in Unix servers the 1 and 4 positions were reversed. "It was a great strategic fit," Wayman says.
"This is a winner-take-all business," adds Clarke. "You have a great opportunity to make profits if you're in a strong position, but it's brutal if you're number 4. Eliminating those number 4s just changed the nature of the industry." In the services area, number 8 HP and number 9 Compaq combined to become number 3 — putting it in a position to bid on work it couldn't have supported before. The biggest example: a $3 billion Procter & Gamble contract in April, for which a prime competitor was number 1 IBM.
Of course, despite all the consolidation, a return to growth in HP's businesses may take a while, and will depend in part on an economic upswing. In the meantime, Clarke and Wayman say that HP is currently innovating at a fast clip. It boasts 3,000 patents worldwide since May 2002 and a $4 billion rate of annualized research-and-development spending, with no slippage from what HP and Compaq together spent in their last year as separate entities.
No Niches to Milk
Still, investors have balked at the merger, especially since it came during the high-tech slump. Stockholders punished both HP and Compaq shares when the deal was struck, and the combined HPQ stock lagged behind Dell and IBM until an upturn starting in early June. "The market has been saying this is going to be a really competitive industry in the future. Nobody will have a real niche that they can milk," says Harold Mulherin, a professor at California's Claremont McKenna College.
Clarke argues that HP's smaller services business actually has a better margin than IBM's—9.9 percent versus 9 percent. (Yes, responds S.G. Cowen's Chu, but HP's margins reflect more maintenance and support work, rather than IBM's broad services lines.) And Clarke sees Dell — not HP — on the defensive in other markets. "Let's remember," he says, "that Dell as a company is half the size of HP, and 68 percent of [Dell's] revenue is in the United States."
In the battles ahead, HP has decided that the integration itself may be a good competitive weapon, even using its success as the basis of a $400 million brand campaign. Meanwhile, the relationship forged between veteran Wayman and newcomer Clarke — now executive vice president for global relations — may also be to HP's advantage going forward. There is even speculation that the 41-year-old Clarke will take the CFO spot when Wayman, 58, retires.
Clarke won't discuss that, but says, "Bob and I are good friends. We'll continue to work closely and consult each other. We have been through a lot together."
Roy Harris is senior editor at CFO.
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