Deal May Boost Service Arm

HP and Compaq hope to see a services uptick.

Although it was never part of the main acquisition agenda, the joining of the mismatched services organizations at Compaq Computer Corp. and Hewlett-Packard Co. could help the pair inch closer to the kind of services growth they couldnt manage on their own through other—mostly unsuccessful—merger attempts.

"Theyre taking two services organizations that have been the tail on the hardware dog," said Traci Gere, an analyst at International Data Corp., in Framingham, Mass. Each services operation generates about 20 percent of their respective companys total revenue and represents a lower-growth business for the companies, Gere said.

Compaq Global Services has seen an uptick in growth in the past two quarters after several consecutive disappointing quarters. But CGS will likely do little to help HP, of Palo Alto, Calif., meet its services goal: to move up the value chain to help customers make business process and change management decisions, industry observers said.

CGS strategy calls for an expansion beyond simple technical support into infrastructure and implementation services, Compaq officials said. But to date, tech support continues to constitute most of the groups engagements.

Its a far cry from the bold assertions made two years ago, when Compaq acquired Digital Equipment Corp. and Digitals successful services operation. Executives at the time crowed that services for Compaq would become a $15 billion business in a few years.

Compaq has since struggled to integrate its Digital assets and has never hit its stated mark of generating 30 percent of its revenues from services. In fact, the Houston computer company began courting additional services companies earlier this year to help flesh out its strategy.

A deal to acquire services company Proxicom Inc. fell apart late in negotiations last spring, and Compaq was on the verge of closing a deal with a runner-up to Proxicom at the time the HP talks began.

HP, for its part, was eager to gain expertise and the types of relationships necessary to provide business process and transformation consulting services. But HP last year failed in its bid to acquire PricewaterhouseCoopers IT consulting practice. Meanwhile, HP is continuing to negotiate to buy the professional services division of Comdisco Inc. Today, HPs professional services business is largely focused on implementing technology platforms—primarily HPs.

"Everyone else is just an IBM wannabe," said HP customer Norm Weiner, CIO at Duane, Morris & Heckscher LLP, a Philadelphia law firm with 450 attorneys and 20 offices. Weiner is concerned that the merger could hurt the excellent technical service that HP has provided—something Compaq failed to provide years ago.

Both Compaq and HP have emphasized their ability to join with third parties, which could make the combined services organizations an appealing partner to members of the so-called Big Five consultancies.