By Dr.Mitul Mehta

HP - One Year on [Article done for HP User Group and HP USER Magazine]

I am generally not in favour of large mergers, especially large technology mergers. They rarely are successful with too much disruption, different cultures and too many political agendas. There tends to be a period of negative morale in the new company and just shifting and entangling the mess and getting the workforce focused on a positive spiral weakens or even losses the original goals of the merger. Given this and having seen and advised on a number of mergers in the IT and Communication industry you may wonder why I was one of the few European analysts who very early came out openly in favour of the HP/Compaq merger over a year ago. Simply put, having seen the two companies very closely over a number of years I just could not see them surviving long term as they were, they needed the breath of solutions, economies of scale and self belief of a genuine leading alternative to IBM, to provide vision and leadership to the IT industry.

The two companies solutions were complimentary and the synergies were extensive once you focused in on the depth of solutions and the verticals they targeted, the skill they had, as well as the technologies possessed and being developed in the laboratories. Given this it was still a wonder if the leadership could pull it off and create a new successful HP. I believe the jury is still out on that and it’s to early to diagnose whether they will ultimately be a success. I predicted a few years of hardship and short-term pain before the fruits would ripen and despite the latest quarter results and predictions of a turn around, I believe it will take a few more years before it blooms.

The question that then springs to mind is that for the new HP to be successful, are the right seeds being planted and natured? Is the right environment for development created? And more to the point is the leadership providing the right vision, structure, depth of experience and employee focus? The answer to these questions so far is mixed and the balance could still tilt in the negative direction.

The bottom line for a successful merger is if both companies have equal downside and need each other equally. It has to be in mutual interest of both parties and if its more partially favourable to one or the other, the merger will not be successful. Their survivability has to depend on each other. It has to be a win-win situation for both companies, their future goals have to be clearly aligned and the cultures of both companies need to be fairly favourable with each other. In HP/Compaq’s case a lot of the above applies, so the basics were there to build on. One would however question the cultures issue and this will eventually be the key to the outcome. If all of the old “HP WAY” is lost and don’t forget Digital had a similar culture to pre-merger HP (which was still present in parts of Compaq) then I think the merger is still doomed to failure. Unless you can keep the experience along with the new change management, you will just end up making all the same mistakes!

Thus far, the leadership has said all the right things, jumped very fast of the blocks, put in good roadmaps, integrated the internal systems, negotiated better deals with the suppliers and delivered on the early promises of significant cost savings. They also have had a few early successes in the services business. Given that the market is still in the doldrums, this has actually benefited the leadership by providing cover for more drastic action as well as bought some time to show significant improvements especially in the PC and Enterprise arenas. The printer business is still the saviour but margins are at risk. Once benefits from the cost savings diminish questions will be asked as to what growth is occurring and how have they changed the basis of competition in the industry. Are they genuinely able to challenge IBM, resist Dell, able to provide a full range of solutions (including services) from enterprise to mid-range to SMEs as well as the consumer segments? What about quality, after care service, vision and depth. What about margins? Speaking to Kasper Rorsted, the European MD, he highlighted taking the right steps but mentioned that HP still had a long way to go before these success measures could be judged. This is true but I think we can see signs of some early weeds in the HP orchard.

Slightly ironic and coming as a surprise to me, I am beginning to become concern about the lasting success of the merger if HP doesn’t stop the bleeding of experience out of the company. A lot of the HP way was about integrity and experience and not about appearance and image. I see this being replaced with pre-merger Compaq culture as well as inexperience HP personnel. You need experience at all levels together with new blood and not just at the leadership level. It’s also shameful the way Carly Fiorina is attacking IBM as a bunch of consultants and not engineers. In case she has forgotten the pre-merger Compaq weeded out a lot of the old experience staff only to be replaced with consultants from the big six. Also its not wise to go around attacking competitors only to find yourself in a similar position at a later stage and if HP is serious about becoming a leader it will have to move up to the consulting space at some stage. I urged Ann Livermore to take HP into the services field nearly six years ago and was glad when she did and would like to see them succeed but there has to be depth to the offerings and not just an image remake. Speed and agility are essential but only succeed if the solutions are right in the first place.

The current mix of leadership does not inspire confidence at all levels, the mix at the top seems right but will they stay? The mix at geographical and departmental level is definitely questionable, there needs to be more depth and just because you articulate a marketing plan does not mean its right or will work. Mix messages such as in web services, server groups, don’t help and neither does wholly relying on a few partners. HP of old knows the problems of betting just on Microsoft or Intel and even though most of their current revenue is derived from these partner technologies, HP has to balance the risk and provide full support for open alternatives and not mere words. Itanium is now starting to show progress but the pace has been slow and the window of opportunity will start to lapse. HP needs to show its value proposition and capitalise on the processor cost structures and accumulated developmental knowledge.

The winners of the merger apart from the new stronger HP are Dell and IBM. Dell has become an alternative and now leads the PC space and is creating partnerships to fill missing gaps. IBM has fortified its position and is exploiting the services and on-demand opportunities to the maximum. The losers are SUN, EMC, EDS and Gateway who need to create the right partnerships or be acquired to leverage their install base. Even though HP has delivered on its promises of cost structures and integration, it has not yet become a genuine alternative to IBM. For it to do this, it needs to focus higher up the value stack especially in services and needs to be able to articulate a longer-term vision. The recently launched initiative on “Adaptive Enterprise” seems very weak and lacks sufficient depth to be taken seriously and needs serious work on it. Its still early to identify what the HP brand stands for and the new HP seems to be everything to everyone. They want to be like Dell but need the channel and also want to be like IBM but need high-end service partners, who are soon going to compete with their channel partners!

The early signs are the new HP is doing a lot of things right and the merger is well positioned. However, as the company changes it needs to hold on to the experience people and maybe even bring some depth back. It needs to have substance and provide a genuine alternative to IBM with slightly less focus on image. The future still holds a lot more restructuring, more cost containment, and critical integration of certain groups especially in the enterprise business. The company has recognised this and there is an effort to streamline and shorten the reporting lines but more of these cases will come up and will need to be identified. They will have to buy their way into the higher end of services and make sure the channel is not messed further. The channel partners are already going through huge changes and enormous pressure without wanting more hassle and HP needs to make sure they are supporting them.

I still believe the merger was the right thing to do and the road maps and speed of integration was exceptional but critical components of the HP WAY need to be salvaged and work now has to focus on delivering depth, substance and a strong vision. If leadership puts these issues in place they have shown they can deliver on the execution. I hope the garden bed is not thrown out with the weeds and wish them every luck.

 

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