Capellas Explains HP Merger Plans

In its effort to get back to the original mission of information technology-providing good, timely information that can be used to make good decisions-Compaq Computer Corp. is focused on adding value through horizontal integration, Michael Capel

LAKE BUENA VISTA, FLA. – In its effort to get back to the original mission of information technology—providing good, timely information that can be used to make good decisions—Compaq Computer Corp. is focused on adding value through horizontal integration, Michael Capellas declared.

In his Mastermind Keynote interview at the Gartner Symposium here this morning, the Compaq chairman and CEO explained the rationale behind his companys proposed multi-billion-dollar merger with Hewlett-Packard Co.

Capellas said the thinking behind the deal was to create a single company that could offer a "complete solution." Such a solution, he said, would address large data storage requirements; fault tolerant computing; commercial databases; technical computing and simulation; and content delivery and storage services—all with a company with critical mass. Both Compaq and H-P each had "three market leading positions" in different areas.

"The primary driver was to have a different set of economies," Capellas added.

The real challenge for the two computer makers is in melding the cultures of both organizations together—a task that Compaq has not done well in the past with its Digital Equipment Corp. acquisition, according to Gartner analysts.

"The key is to recognize there is a community within a community. You have different cultures between the PC business and high-end computing," Capellas said. Maintaining those two cultures is acceptable, but the "cultural values" within each of the disciplines are the same. "Our two companies have the same core values," he asserted.

At the same time, the core strategies of the two sides is also the same. "Customers want the whole solutions stack and they want you to support it. They want the products and the services bundled around them. Combined we will have critical mass and an unmatched global footprint," Capellas proclaimed.

Both sides also have a "world-class customer support organization," which Capellas believes can naturally evolved into world-class professional services.

The combined company can compete effectively against IBM and Electronic Data Systems Corp. because it will have the "architecture, support, integration with applications, and hardware. We have the entire stack to do that," Capellas claimed. "We can use the best of the industry, while [IBM] is vertically integrated. And we have the imaging and the access business."

Capellas proclaimed the death of RISC (Reduced Instruction Set Computing); both HP and Compaq have declared their intent to support Intel Corp.s IA-64 processors, which are based on the EPIC (Explicitly Par-allel Instruction Computing) architec-ture. The factors that will turn IA-64 into the next standard building block will include technology investment, economies of scale, the ability to at-tract developers and the movement towards clustering and parallelism, he said.

Sun Microsystems Inc. and IBM are not going that route because "they are vertically integrated," Capellas said.

In addressing Compaqs ability to compete with PC rival Dell Computer Corp. on price, Capellas pointed to Houston-based Compaqs efforts to reduce its cost structures. He said that Compaq has achieved through its design efforts year-on-year cost reductions of $300 million. At the same time, Compaq reduced its inventory costs by $1.8 billion.

"Its about using common components and reducing operating costs," Capellas asserted.

Capellas reminded the audience that the industry forgets that "data itself is changing." As data evolves from rows and columns to dense, unstructured formats, Capellas said that Compaqs role is to provide "hardware, software, next generation content services and [put] it all together."

In addition to the evolution of data from a structured to an unstructured format, another megatrend Capellas sees in the IT industry is a return to supercomputing. "If all we do is take the data into one store and do pattern recognition, there is a huge opportunity to solve the huge security problem we have now," he said.