On 3 May 2002, Carly Fiorina, CEO of Hewlett-Packard (HP) finally completed the riskiest deal she is ever likely to broker: the $18.7 billion acquisition of PC and server company Compaq.
After months of in-fighting and legal action over the proposed deal, the newly formed company will have revenues of $78 billion, based on 2001 revenues, $6.9 billion behind those of IBM. But whether HP can overtake IBM, or will fall further behind its rival, will depend on how the company's new management team handles the integration of the two companies in the next few months and years.
Now that the dust has settled, and with Fiorina's technology roadmap unveiled, customers have a clearer idea of what the merger will mean for them.
HP has reorganised itself into four divisions: the Enterprise Systems Group, the HP Services group, the Imaging and Printing Group and the Personal Systems Group.
Overnight, HP has doubled the size of its services division. For Fiorina, this was one of the key drivers behind the deal – to push into services to make up for
depressed hardware margins. But at the same time, HP has also amassed a bulging portfolio of frequently overlapping hardware and software products that will require judicious rationalisation if HP is not to alienate nervous customers.
It is in the Unix software and hardware business that rationalisation will cause customers most anxiety. Quite simply, many will need to take a second look at their Unix migration roadmaps, although their plans should be little changed from the ones drawn up pre-merger.
Both HP and Compaq were already committed to migrating customers from systems based on their proprietary Risc microprocessors, to Intel's 64-bit Itaniums – just as soon as Intel gets to grips with its Itanium performance problems.
However, HP now has five Unix operating systems to grapple with, but plans only to continue support for three: HP-UX, OpenVMS and Non Stop Kernel, says analyst Martin Hingley, vice president of research company IDC's European systems group.
OpenVMS and Non Stop Kernel are legacies of Compaq's previous acquisitions of Digital Equipment and Tandem, respectively. But Compaq's Tru64 Unix, currently running on Alpha, will be ditched, with the last update coming as early as 2004.
While HP will provide many tools and services to help customers migrate, it will still not be a straightforward task for many customers, warns Hingley. "Customers will have some hassle in migration, but it is likely to be most where they have been able to write directly to the hardware. Both Alpha and PA-RISC migrations have proved difficult," he says.
For the HP Services division, the transition should be smoother. Acquiring Compaq's Global Services division represents a belated triumph for HP, after its proposed purchase of the consulting arm of accountant PricewaterhouseCoopers (PwC) fell through in November 2000.
During 2001, HP and Compaq reported services revenues of $7.6 billion and $7.8 billion respectively, although much of Compaq's services revenues are generated at the lower end of the services market, in areas such as PC maintenance.
In software, there will also be little change, say analysts. HP will continue to focus its primary efforts on its popular OpenView systems management suite, which has continued to dominate its market niche while other HP software acquisitions, such as its January 2001 purchase of application server software vendor Bluestone, have faded into obscurity.
Yet the reorganisation could still take years rather than months, simply because of the sheer size of the two companies. "It might take three to five years before HP can deliver real financial benefits from the merger. Also, Carly Fiorina and Michael Capellas [former Compaq CEO and now president of HP] have no experience of merging two companies [of this size]," says Charles Homs, an analyst at IT market research company Forrester Research.
But unless the restructuring goes smoothly, with little or no disruption to customers, HP risks losing market share in a number of key sectors, believes Homs. "Vendors such as Dell, IBM and Sun Microsystems are likely to gain market share [in hardware]," he concludes.
While the biggest risks arguably still lie ahead for Fiorina, analysts agree that such a deal was an imperative for HP. "Without Compaq, HP will slowly have devolved into mediocrity. In contrast, the combination offers a chance for greatness – despite the potential for spectacular failure," Charles Rutstein at Forrester.