RAY SUAREZ: When Hewlett Packard announced it would buy rival Compaq Computer in early September, the goal was to create the world's largest personal computer maker, one that could compete with the likes of IBM and Dell. But since the announcement, negative reaction from the stock market and skepticism from industry analysts have called into the question the deal's viability. In the latest setback for the merger, and possibly the most damaging, Hewlett-Packard's largest single shareholder, the Packard foundation, announced Friday that it plans to vote against the deal. A note to viewers: The NewsHour is funded in part by a grant from the William and Flora Hewlett Foundation.
For more on where the merger stands now, we're joined by Peter Coffee, technology editor at eWeek, a newspaper covering the electronic business world. And Rob Enderle, technology analyst with the Giga Information Group, a consulting firm. Why don't we start with the companies themselves. Peter Coffee, tell us about Hewlett-Packard and Compaq, what they do, what they make.
PETER COFFEE, eWeek Magazine: Well, Compaq really exploded on the scene with its introduction of the first so- called luggable, portable PC although supposedly sketched out on a place mat, it was a 34-pound box but it worked just like an IBM PC -- that was of course a fixed desktop machine. And it really propelled the company into one of the fastest early growth periods that's ever been seen in the history of corporate America.
Later on the company acquired Digital Equipment Corporation largely for its services field force to try to get out there and start selling the high-value services that are increasingly being wrapped around information technology. Hewlett-Packard is known to generations of engineers for things like calculators.
Then it moved into personal computers and larger computers. It has a very profitable business in printers - formerly pen plotters although that's gone now -- but the company is very well respected for the strength of its technology and for the integrity with which it's always made a habit of doing business.
RAY SUAREZ: So Rob Enderle, here we have two big players. When the leaders of these two companies announced their intention to merge, what was the rationale? What was attractive about each side in the new marriage?
ROB ENDERLE: Well, the thought was that you would gain economies of scale by combining two of the largest players particularly in retail, in the retail of PC's into one company. You could quickly grow to a company that would rival IBM, certainly beat Dell in terms of sales size and with regard to IBM services, scope.
So it added up kind of a concept of being able to jump ahead of the market, much like Compaq wanted to do with Digital and quickly reach a position where you would have cost advantages and sized revenue advantages over the other competitors in the space.
RAY SUAREZ: We've seen a lot of mergers where bigness is a cornerstone of the rationale. How was this announcement received?
ROB ENDERLE: It wasn't received well. I think one of the big problems is the large mergers that have occurred in the space, the Compaq-Digital, NEC-Packard Bell merger have to a large extent been colossal failures. In those two cases it was a healthy company acquiring an unhealthy company.
In this case both companies were under a great deal of pressure in the industry and looked said this doesn't make sense to us. You have two companies that are both not as well as they should combining -- they kind of view this as being the end result will be a much larger unhealthy company.
RAY SUAREZ: Peter Coffee, what followed was the oldest sons of the two founders both announcing pretty soon after that they were going to use their blocks of shares to oppose this thing. Now comes the Packard Foundation's announcement. How big a role and why does the family play this big a role in a company that's moved on from close family control?
PETER COFFEE: Well, the garage in which the original founders of the company built their first product was at one point considered one of the central landmarks of Silicon Valley, almost its birthplace, if you will. That was a piece of audio equipment that was sold to Disney to make the movie Fantasia.
The reference in which Silicon Valley holds Hewlett-Packard should not be underestimated and the notion that it might be moving away from its core values is threatening to a great many people. I think what people want to see is the notion that the success of Hewlett-Packard will continue to be based on innovation on creating new technology for solving problems rather than becoming another player of a monopoly game and pushing pieces around the board and using the same commodity technologies that everybody else uses but trying to make its way just by deal making.
That's not what people of when they think of that company. That's why the founders' heirs are exerting the leverage that they are in the discussion of the proposed merger.
RAY SUAREZ: A lot of people have talked about individual shareholders who comment in public have talked about something called the HP way. What is that?
PETER COFFEE: The HP way has been, as I was saying earlier, based on one engineer at one product development bench looking over at the next bench and seeing what his colleague would find a better way of getting his job done and saying we ought to make that and the kind of internal growth by engineers looking at each others' work, seeing each others' problems and finding very remarkable and clever solutions to those problems rather than simply adopting the same cookie-cutter technology Microsoft Operating Systems, Intel processors and just putting it in a box with a different trademark on the outside.
RAY SUAREZ: Well, Rob Enderle, now that the Hewletts and the Packards have spoken publicly and together they control about 18% of the traded shares of the company, what does that mean for the other 82?
ROB ENDERLE: Well the majority of those are owned by institutional stockholders and those stockholders are likely to look at this very similar to the way the Packard foundation did -- in other words do a level of analysis to see if this really does make sense and if they do follow that same method, they're likely to conclude much the same way that Packard did that this is not a good idea for the firms.
I think what was lost when the firms first came up with this idea of going together was the cost of the overall merger itself, the loss of business, the kinds of trauma that occurs during the merger and now that's come back to bite them as they try to go through the approval process.
RAY SUAREZ: Well, central to this story is recently hired Hewlett-Packard CEO Carly Fiorina. She's got a lot riding on this, doesn't she?
ROB ENDERLE: Pretty much. Her job's really riding on this. There have been a series of failures that go back to an attempt to acquire a services organizations to fill out the services unit that fell through, a series of repetitive lay-offs which have caused staff problems and dissension in the ranks. Of course this would be the biggest failure. Yes this clearly has... This clearly has the possibility of doing her career a great deal of damage.
RAY SUAREZ: Peter Coffee, bounce off of what you just heard Rob Enderle say. Is this an uphill battle for Carly Fiorina and is it one that is lost already?
PETER COFFEE: I don't know if it's lost already. But the stress has been placed on what a great deal this is for the two companies, and there has not been a lot coming from Ms. Fiorina on the subject of what this does for the customers. There has not been enough of a statement of why the combined companies will be able to solve their customers' problems in ways that neither company alone can promise.
And I think that's the message that really needs to be driven home in a very profound way if they're going to get the stockholder majority that they need for the deal to move forward.
RAY SUAREZ: Has this deal become in part a victim of tough times? If we had been working with the pre-bubble burst numbers, might it all have looked more like a done deal?
PETER COFFEE: I think that what we've seen here is not so much a victim of any dot-com implosion. The demand for the technologies that these two companies make continues to be quite strong. When people say the market is soft in this area, that's what happened if you have five different companies that each thought they could get a third of the market. You have a certain amount of excess capacity but companies are still buying information technology in a big way.
The problem is they want to see that technology supported by services that really help them solve very difficult problems of making different pieces of software talk directly to each other, having fewer expensive and sometimes error-prone people involved, the whole Web services mantra that we've been hearing from Microsoft and other companies really depends on a very high level of professional services to support the technology.
What needs to be heard from Ms. Fiorina and from the Compaq management is how that field technology force that they've got out there is going to evolve from essentially people who come out and fix things to people who come out and fix businesses. That's really the challenge that needs to be addressed.
RAY SUAREZ: Well, Rob Enderle, just heard Peter refer to five players that all want a third of the market. Isn't merger one of the rational ways to make sure they're both standing at the end of this?
ROB ENDERLE: Well certainly that was one of the things that was proposed by the financial analysts as the market started to collapse was the fact that companies were going to have to merge and in a way it was strange to see a lot of those same analysts come out and be credibly critical about this particular merger.
Fundamentally the difficulty is we've got so few successes to point to in this space, in fact virtually none, that it was very important that Fiorina and her staff get out real early and explain why this one was going to be different.
It's a political battle. This is a case where the lead politician trying to drive their case through was largely quiet throughout the process. In fact as different things started to break, it was incredibly surprising that the counter message was not driven back through, that there was in fact value here.
It was unfortunately is appearing to be a political battle where the politician that's fighting for their job is not really showing up at the critical meetings and press events.
RAY SUAREZ: Rob Enderle, Peter Coffee, thank you both.