Feds await details on HP, Compaq merger

Federal customers will have to wait for more details to assess the impact of last week's proposed merger agreement between Hewlett-Packard Co. and Compaq Computer Corp.

The merger would create a combined industry powerhouse with top worldwide revenues in servers, access devices (PCs and handheld computers), and imaging and printing.

The approximately $25 billion merger will result in 15,000 job cuts worldwide, but it hasn't been determined whether those reductions will affect the firm's government divisions, said Steve Sievert, a Compaq spokesman. After the job cuts, the merged company would employ about 135,000 employees.

"At this point, beyond the public announcement, there's not a whole lot of detail," Sievert said. "The announcement is for an intent to merge, and there's a whole lot of homework that needs to be done before discussing the potential impact of the merger."

A spokesman for HP's public sector organization said the company understands that its government and education customers, like their private- sector counterparts, are "focused on enterprisewide solutions." The combined company — which will still be called Hewlett-Packard—"will be a powerful new solutions provider, well-equipped to compete in the enterprise space," the spokesman said. "As both companies work through the merger, HP will not waver in its commitment to customers in the federal government, in state and local governments or at education institutions," he said.

Carly Fiorina, chairman and chief executive officer of HP, will be chairman and CEO of the new HP. Michael Capellas, chairman and CEO of Compaq, will be president and will join four other members of Compaq's current board of directors on HP's board once the deal is closed, which could take place in the first half of 2002, barring regulatory concerns by the U.S. government and the European Commission.

The new HP will be structured around four operating units:

* A $20 billion imaging and printing franchise.

* A $29 billion access devices business.

* A $23 billion IT infrastructure business, encompassing servers, storage and software.

* A $15 billion services business with about 65,000 employees in consulting, support and outsourcing.

Jim Kane, president and CEO of Federal Sources Inc., said this is the first time he's seen a merger or acquisition like this on the hardware side, and therefore, there's "no real model" to see how it's going to play out. But he said the most intriguing part of the proposed merger is the combined services strategy that the new HP can offer government customers.

"One of the things we've seen is the [government market's] strong preference for total solutions, including hardware, software and services," Kane said, adding that services have become a vital part of IBM Corp.'s federal business and should also serve the new HP well. "They're in a better position as a merged company for total solutions."

The merged entity will be headquartered in Palo Alto, Calif., and will retain a significant presence in Compaq's Houston home, including a strategic engineering and product development center.

Larry Allen, executive director of the Coalition for Government Procurement, said both companies have a "significant federal market presence" and that management teams in their respective government divisions should help them continue to prosper as part of a new, combined entity.

"The management teams of their federal businesses should be able to leverage the merger in the federal market very nicely," Allen said. "They are well-positioned to do so."

What remains uncertain in the overall scheme is if the deal will prove beneficial. Some analysts are skeptical.

Andrew Butler, a research director at Gartner Inc. and a former HP em.ployee, said the deal would result in "many overlaps in products, technologies, distributors, services, facilities and jobs." Despite some cost savings, "the com.panies have failed to do a good enough job of presenting the benefits of an acquisition of this size to justify the deal's risk," he said in an analysis of the deal.

In the area of services—where the combined entity is hoping to make the most headway—both vendors get most of their revenue from "low-growth, hardware-support offerings [and] faster growing services such as consulting, systems integration and outsourcing would still elude them without significant investment," both internal and via acquisition, Butler said.