Hi-tech harmony: the marriage doomed to failure goes from strength to strength

Stephen Pritchard reports on how HP-Compaq defied the doomsayers, forged a successful partnership and created a blueprint for IT mergers

When Carly Fiorina revealed HP was to merge with rival computer maker Compaq, both Wall Street and the IT market greeted the news with nothing short of scepticism.

It was on 4 September 2001 when Ms Fiorina, the chief executive of HP, announced the $27bn (£17bn) deal, so the world had yet to witness the terrible events of 11 September and the consequent falls in the markets and in business confidence.

But the IT industry was already in the grip of its worst-ever downturn, and few observers believed a union between the world's second- and third-largest computer companies could work. Few if any deals on that scale had lived up to their expectations; in IT, none had done so.

Scroll forward almost two years and the picture is very different. Analysts are bullish about the "new HP", predicting earnings per share of $1.20 for the current financial year which ends in November, against $0.79 last year. The shares, hovering around $21 this week, are just a shade off their 52-week high of $22.80, reached last month.

Technology analysts now believe the merger has been a success and that the jinx on large-scale IT deals is lifting. Further consolidation in the indus- try now looks inevitable. In the software sector, for example, Oracle is bidding for PeopleSoft, which itself had hoped to buy JD Edwards before Oracle intervened.

To Jeff Clarke, the executive vice-president of global operations at HP and joint leader of the deal with Compaq, the scepticism of so many outsiders came as no surprise.

"When Carly announced this, it started off the consolidation of the hi-tech industry," says Mr Clarke. "It was controversial and bold. She was announcing the largest merger in the history of the IT industry, when no merger before it had been successful."

In fact, HP-Compaq was the latest and largest in a series of consolidation plays in IT. Mr Clarke had previously experienced the merger of Compaq and DEC, a maker of large computer systems. Unlike the HP-Compaq deal, Compaq-DEC was widely lauded by analysts. But the deal failed to live up to its promise.

Mr Clarke believes that the difference - and the lesson for companies such as Oracle, PeopleSoft and JD Edwards - lies in the way the HP-Compaq merger was planned and executed. At the start, Ms Fiorina appointed a big hitter from each company to lead the merger process. Mr Clarke was chief financial officer of Compaq and headed the "red" team; Webb McKinney, HP's head of sales, led the "blues". Although the final decisions rested with Ms Fiorina, the two companies tried as far as possible to have a mix of Compaq and HP staff in the process.

The merged group also moved quickly to announce the senior management team, an approach that had two benefits. First, it stopped a battle developing over senior jobs. Second, it allowed employees to start work on implementing decisions. "Once we had the command and control in place, there was no longer lobbying for those positions. Instead we had people out executing on the new plans. You can't afford to miss a step in this industry," says Mr Clarke.

In any merger between IT companies, the greatest dangers are indecisiveness and the sort of job insecurity that persuades staff to move on, taking valuable intellectual property with them.

HP-Compaq countered this by setting up "fast start" workshops to bring the companies' cultures together, and by creating a rigorous but rapid system for deciding which products and processes the new, merged group would keep.

This technique, known as "adopt and go", is now being copied by other large organisations involved in mergers, including, says Mr Clarke, the US Department of Homeland Security.

It was adopt and go, HP believes, that saved the merger from becoming bogged down in detailed arguments about the relative merits of rival products. This is a problem that has tripped up other IT mergers, including Compaq-DEC, and often causes confused customers to look elsewhere.

"If HP had a product that scored eight out of 10 and Compaq had one that scored seven, in most mergers you would try to take the two and make a product that scores nine," says Mr Clarke. "We said we wouldn't do that but we would keep the product scoring eight and be as rigorous as possible in capturing the value and the cost savings from the seven. We could then execute immediately.

"If we had tried to merge the products, we would have been stuck in debating and redesigning rather than execution."

Adopt and go also managed to limit the number of turf wars between Compaq and HP staff over the products, factories and even people who would remain post-merger. But, Mr Clarke cautions, it only worked because the process was both rigorous and open. Even now, staff can call up adopt and go data to see the thinking behind decisions.

Speed, too, was critical. When Compaq and DEC merged, customers were left waiting, in some cases for years, for product information. With HP-Compaq, product roadmaps were available on 7 May 2002, the day the merger was officially completed.

"Speed in an industry that moves as fast as this is more important than perfection. That is why we called the process 'perfect enough'," says Mr Clarke. "We could not analyse decisions endlessly, but nor were they suboptimal decisions because the processes or products we picked were already working. We were not adopting something that had yet to be developed."

Moving quickly enabled HP to strike early deals with its suppliers. According to company estimates, this resulted in savings of $3.5bn (£2.1bn) in under a year. It also helped HP to win some important services contracts. Before the link-up, HP and Compaq ranked eighth and ninth in computer services; now it is the third-largest company worldwide, and IBM's main rival. Post merger, HP has won significant outsourcing deals with Ericsson and Procter & Gamble, the latter worth $3bn.

Analysts believe the downturn in the technology market has helped HP, especially by forcing buyers of IT to look to reduce costs and cut the number of suppliers. "The severity of the bear market has worked in HP's favour," says Andy Butler, a research vice-president at Gartner. "As much of it is circumstances as it is HP's brilliant foresight. But it was also so well executed that a number of organisations are now talking to HP as the experts on putting together multi-million-dollar mergers."

At HP, Mr Clarke will not be drawn on whether this list includes either Oracle or PeopleSoft, but he believes that there will be more mergers in the technology sector.

In the hardware arena, it might be difficult for any companies to achieve the scale now enjoyed by HP "There is not another Compaq out there," says Mr Clarke. But in software and services, there is still much to play for. "We believe the entire industry will continue to consolidate, through the constant drive for economies of scale," he adds. "You need to be number one or two to have sustainable profits. We see that across IT."

Executives contemplating the merger route could do worse than call Mr Clarke before they call their bankers' mergers and acquisitions team.