Ever since Hewlett-Packard Co. chief executive Carly Fiorina proposed buying onetime rival Compaq Computer Corp. early in her six years at the company, there has been heated debate over whether the combination was the right course for the venerable computer firm.
The merger was pitched to shareholders as a move that would create a company rivaling International Business Machines Corp. in revenue while employing only half the work force. But the company is still struggling against fierce competitors such as Dell Inc. and IBM, and Fiorina's departure yesterday lent ammunition to those who contend that tech mergers seldom prove to live up to their promise.
"It's very rare that they work," said Paul Saffo, director of Silicon Valley think tank Institute for the Future.
Companies in the tech sector have varying track records in the area of mergers and acquisitions, though perhaps no deal quite matches the size and complexity of the 2002 HP-Compaq union.
Software mergers, on the whole, seem to work better than hardware company deals. In a software company marriage, companies gain programmers and intellectual property, valuable commodities in the digital age. Microsoft Corp.'s acquisitions, for instance, have helped the software giant create new moneymaking machines out of products such as video games and its PowerPoint presentation software.
But computer makers are different. Competitors share many of the same suppliers and distribution outlets, so the acquisition of a rival does not necessarily open new doors in those areas.
"There's not a lot that's of value in a PC company. It doesn't have a lot of unique assets," said Roger Kay, an analyst at research firm IDC.
Compaq, for example, never got much of a lift from its 1998 purchase of Digital Equipment Corp., nor did Silicon Graphics Inc. gain much by acquiring Cray Research Inc. two years earlier.
Mergers in other industries, such as the telecom sector, have other pluses going for them, said Tim Bajarin, an analyst with Creative Strategies in Campbell, Calif. Should the wireless carriers Nextel Communications Inc. and Sprint Corp. successfully wrap up their marriage later this year, Sprint hopes to gain a loyal base of Nextel customers. In the tech equipment industry, customer loyalty is more fleeting. "People will switch on a coin toss based on price," Bajarin said.
Slim profit margins
There are other factors. In the tech industry, buying a competitor out and acquiring its manufacturing facilities, for example, can be more liability than benefit. Profit margins in the hardware arena can be in the single digits; any misstep can nudge a company into an unprofitable quarter, and the bigger the company, the bigger the fall.
In pairing up with Houston-based Compaq to become a full-service computer maker and services company, HP increased its exposure to this thin-margin industry. IBM, meanwhile, chose the opposite tack and is in the process of trying to sell its personal computer business to a Chinese company called Lenovo Group Ltd., pending the approval of the U.S. government.
Some say that computer maker Dell, by contrast, is successful because it has mostly avoided having any mergers or acquisitions that might clutter up its lean business structure.
In the best cases of a tech merger, the two merged companies complement each other by bringing together different types of customers or business models that can feed off each other. But analyst Kay said HP and Compaq were too similar — "like Tweedledum and Tweedledee."
Overlapping product lines sometimes meant HP was slow to take advantage of a shift in customer tastes, especially in the initial months after the merger. "Dell could move on a dime. HP, it would take them three times as long as Dell," Bajarin said.
In a conference call with reporters and analysts, interim HP chief executive Robert P. Wayman credited Fiorina for successfully marrying the two companies, but he pointed out recent stumbles the company has made in the server market — an area where Dell has been surging ahead in gaining market share.
Martin Reynolds, an analyst with the research firm Gartner Inc., said the ultimate success of a merger "depends on the details." He pointed to last year's merger of Gateway Inc. and eMachines Inc. as proof that some computer company mergers can work. "Profits are up and revenues are up. It's been very successful," he said.
But these were smaller companies with fewer businesses to integrate under one roof and different approaches to the market. Gateway offered a wide range of consumer electronics products over the Web, whereas eMachines focused on cheap computers sold at big-box electronics retailers.
Meanwhile, the question of whether the HP-Compaq merger was actually a success is still the subject of argument. It might turn out to be one of those timeless questions for Silicon Valley.
Jeffrey A. Sonnenfeld, associate dean at the Yale School of Management, was one of the HP-Compaq merger's harsher critics; yesterday he said he saw Fiorina's ouster as "pure vindication" of his belief that the merger was wrongheaded and a bad deal for HP shareholders.
"There's absolutely nothing positive about it," he said. "It was a preventable tragedy."
Bajarin, however, said, "It's too early to say that the deal is a failure."
