PC Pair Goes For Broke

If the computer industry's biggest merger ever succeeds, the combined Hewlett-Packard and Compaq Computer will have an opportunity to position the company as a Linux leader and a powerhouse in e-business services such as Web hosting.

If the computer industrys biggest merger ever succeeds, the combined Hewlett-Packard and Compaq Computer will have an opportunity to position the company as a Linux leader and a powerhouse in e-business services such as Web hosting.

Last week, the merger looked to many like a defensive maneuver to survive in the battered technology market. Like football players throwing a desperate Hail Mary pass, the companies will either score to win big - or stumble off as Internet-age casualties.

While the initial attention was on the combination of two struggling PC companies and antitrust scrutiny ahead, the new HPs risky bet for the future seems to be on providing consulting and outsourcing services to accompany its hardware.

One of the deals key drivers is that HP and Compaq are closely aligned in their technology strategies. Both support multiple server operating systems: Each has its own Unix platforms, and both support Windows NT and Linux. The new HP has a chance to carve a niche as the Linux company of the future, supporting the open source OS on a range of hardware, according to analysts.

HP and Compaq are also the only big computer suppliers whose primary focus is on Intels new 64-bit Itanium chip. If Itanium succeeds, the combined company could grow to a dominant position in the next decade, some experts predicted.

In several areas, such as high-end servers, printers and storage, the companies have complementary offerings. By jumping to No. 1 in the PC market, HP and Compaq will gain a much more powerful position from which to knock back Dell Computer across the board, particularly among Internet hosting firms that act as channels for servers.

And HP and Compaq should mesh neatly on their high-end Unix server and storage lines, analysts said. "If the merger were to go through quickly, I think HP and Compaq could block Dell from ever penetrating the glass house [enterprise data centers]," said Brooks L. Gray, senior analyst of Technology Business Research.

HP CEO Carly Fiorina, who will head the new company, was busy explaining that the $87 billion IT powerhouse was about more than combining PC companies after the Sept. 3 merger announcement. "Obviously the PC business is an important topic," Fiorina said. "But we hope weve demonstrated that this combination is about so much more than the PC business."

Hardly anyone, aside from maybe Fiorina and Compaq CEO Michael Capellas, who will become president of the new HP, was sure that the companies will be able to pull it off. Investors, predictably, were spooked by the uncertainty. Originally valued at $25 billion, the stock deals worth fell to about $20 billion just two days later. Some shareholders were skeptical, raising some doubt about whether the deal will win their approval.

But some Web hosters believe the HP-Compaq coupling, along with Fiorinas championing of outsourced services, has arrived not a moment too soon. All large server vendors have established relationships with resellers such as Web hosters. But in the future, hosters said, they will increasingly want to work with partners like HP-Compaq to give business customers more outsourced services.

Executives such as Sean Brophy, vice president of Verio, will look to HP-Compaq to design, install and test custom server farms. Other services could include maintenance and upgrades, as well as assurances that proposed architectures can handle the traffic load. "As we move up the market and the Internet becomes more pervasive, this IT outsourcing will become the meat of the business, and that requires professional services capabilities," he said.

While other companies in the field, such as IBM and Sun Microsystems, provide these services with their gear, HP-Compaq could dominate the Intel-based server niche and have a competitive - if not better - international footprint with such professional services, Brophy said. Dell doesnt have a comparable professional services offering yet, he added.

As companies such as IBM have discovered, big consulting practices require ownership of data center space. Both HP and Compaq have made inroads: HP bought space in several data centers in Europe and owns a data center in Australia; Compaq has invested in WorldComs Digex and in a software-on-demand venture with Cable & Wireless and Microsoft.

"For Compaq and HP, getting into services like hosting is a necessity," said Andrew Schroepfer, president of Tier 1 Research. "I dont think you can count on selling PCs or any kind of hardware. HP has got more valuable assets on the software front, and they are going to be enhancing their consulting practice around that."

But other Internet hosting companies voiced concerns that the nitty-gritty details of knitting HP and Compaq together will cause disruptions. "I dont want them to be distracted. I dont want to be forced into product adjustments because of the integration of their product lines," said Joel Kocher, CEO of Interland, a hosting company.

Analysts said Dell, IBM and others will become more aggressive in their attempts to take business as HP and Compaq go through the messy process of merging operations. "If they cant get the integration right in the selling and services side, thats an opportunity for a competitor to regain share," said Ford Cavallari, global practice leader for e-commerce of research firm Adventis.

And as Fiorina and Capellas each acknowledged, the process of consolidating the two behemoths in one Palo Alto, Calif.-based entity will be a huge task. The biggest overlap between HP and Compaq is in their currently unprofitable PC lines, and it is in this area that the companies see the greatest potential for cost reductions: The new HP will save $2.5 billion in costs per year starting in 2004, much of that coming from the elimination of 15,000 jobs.

The integration will mainly be a political and logistical issue, analysts said. "Certainly, almost everyone at Compaq is getting a new boss," said Harry Fenik, president of The Sageza Group, a technology research firm.

HP will be "the surviving brand," Fiorina said, though Compaq will remain a "sub-brand." She also said certain assets of HP-Compaq might be divested, but she would not say what those might be. It will be at least three months before HP divulges consolidated product and technology roadmaps - and which products live or die.

"HP and Compaq feel if they can come out of this with a unified company and a strong, compelling story behind it, they have the potential of capturing industry spending once theres an upturn in the market," said Tom Kucharvy, president of technology consultant Summit Strategies. But, he added, "If I were at one of these companies, I wouldnt have done this deal. There are too many risks."

Senior Writer Max Smetannikov contributed to this report.