Computer Megamerger

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• MARGARET WARNER:

  Hewlett-Packard and Compaq Computer have been fierce rivals until now. Both specialize in computer hardware, which has seen slumping sales in recent months. Silicon Valley icon Hewlett-Packard was created by the late William Hewlett and David Packard in their Palo Alto garage 63 years ago. Today, it's valued at more than $45 billion. It's the world's number-one seller of computer printers, and ranks number four in worldwide sales of both PC's and computer servers.

  Compaq Computer, founded in 1982, offered the first IBM clone, a portable personal computer that ran on the same software as IBM's PCs. Today Compaq is valued at nearly $21 billion. It's number two in worldwide sales of PCs and number one in servers. If approved, the merger would create a new company with 135,000 employees and $87 billion in annual revenue. And if current market shares hold, it would be the world's number-one seller of PCs.

  For more, we turn to Mary Fran Johnson, editor of Computer World, a weekly magazine covering the computer industry. Welcome, Ms. Johnson. So, why would these two companies want to merge?

• MARY FRAN JOHNSON:

  Well, that's an interesting question. I think a lot of people were taken by surprise by the merger. If anything, I would have expected HP to be interested in Dell Computer Corporation rather than Compaq because Dell has had such a successful run in the PC business, and a lot of what Compaq has been trying to do is catch up with Dell's way of selling directly to consumers.

• MARGARET WARNER:

  As we mentioned, both these companies have seen their sales slump in recent months but so has the whole industry.

• MARY FRAN JOHNSON:

  Yes.

• MARGARET WARNER:

  Is that the reason or have they also made mistakes essentially that have put them even more behind the curve?

• MARY FRAN JOHNSON:

  There probably are mistakes that both of the companies have made over the last year or two certainly. There has been a… There was a great deal of optimism in the computer industry that the surge of e-business and the dot-com revolution would continue. And so a lot of companies staffed up tremendously and got into producing much more inventory and products than they could actually move.

  And a lot of the business models also have essentially suffered in this economic downturn, and we're seeing a lot of consolidations that will continue to go on, I think, in the computer industry. This is probably just the biggest one we're going to see this year.

• MARGARET WARNER:

  But I've read somewhere that, for instance, Hewlett-Packard, which had a fabulous printer business and still does but kind of missed the transition to the Internet.

• MARY FRAN JOHNSON:

  Indeed they did. A lot of folks in the computer industry have been waiting for HP to state a real strategy. IBM got into the game very early on and staked out the territory as they were the company to turn to for e-business.

  If you wanted services and support to do commerce on the Internet, they were the big company to come to. Cisco certainly made an enormous business for itself as the routers and the switches that powered the Internet. Sun Microsystems had similar success. And HP never seemed to have a strategy that actually approached that, that was a definitive "here's how we're moving into the Internet age."

• MARGARET WARNER:

  And then what are Compaq's problems? I mean, it is, what, number two in PC sales still?

• MARY FRAN JOHNSON:

  Yes. Compaq's problems, they have been caught up to a great degree in the fact that their business model called for them to deal through the channel, through resellers that sell the computers for them, to corporations, to big companies that buy them. They've never been very good at direct sales to consumers.

  And the… once corporate America started buying PCs direct, the price wars started to hit home there as well because the PCs are basically a commodity. This is one of the reasons why Compaq has wanted to move higher up the food chain into servers because it's just a very razor-thin margin in selling PCs, and they've just never been as nimble at it as Dell has. Dell has in fact overtaken them using a direct sales model here in the U.S.

• MARGARET WARNER:

  All right. So explain why these two companies with these problems… Why we're will merging these two companies make the combined company more competitive?

• MARY FRAN JOHNSON:

  That's actually something I haven't heard a good explanation for myself. I know that when Compaq acquired Digital back in 1998, they were at the top of their game and the talk then was that the synergy of the two companies that they would bring all these new things to the table for each other — and yet it was the beginning of a long slide into the opposite of prosperity for Compaq, just the digestion of a company the size of Digital and the number of people that had to be laid off, it was just a tremendous and painful transition for them.

  And when I heard the news this morning that HP and Compaq were combining, I immediately had this image of two weakened giants somehow merging and thinking that that was going to make a stronger giant company. And the math doesn't make sense for me either.

• MARGARET WARNER:

  Now the two company executives did have the press conference today. What was their argument about why this was a great thing?

• MARY FRAN JOHNSON:

  Well, they're talking about better service for customers and the synergies and the technologies that they will bring to the table together. It's a lot of the same — essentially the same kind of vague talk that you hear when these mergers take place. On the customer reality side of it, we've been hearing a lot today on some of our forums on computer world.

  The folks that buy computers or that are the customers of both of these companies. And they're asking similar questions where they wonder with each of them struggling with their financials and having trouble on the service and support side how the two of them working together are going to be better off because some product lines will have to be combined. There are very obvious overlap areas, redundancies between the two companies that will have to be eliminated.

  So that means that everyone who works at Compaq and HP are people that are going to be worried about their jobs that will probably have to reapply for the job they have now. They said initially that 15,000-20,000 people would be laid off. I suspect that if this goes through within a year we'll see many more than that, in the tens of thousands.

• MARGARET WARNER:

  Now, you said earlier that you thought the whole industry was heading toward a time of greater consolidation. You mean having just, say, two or three big PC makers?

• MARY FRAN JOHNSON:

  Yes, that's one of the likelihoods. I think a lot of the companies that made their names in e-commerce that are some of the big software companies are probably all looking at it. The last time we saw a wave like this was in the 1980s right after the PC revolution.We tend to have one or two years of enormous prosperity around a new technological change.

  Back in the '80s, of course it was PCs. And in the late '90s it was around the Internet. And then the sort of natural wave curve that these things follow is that there will be a tremendous growth of a number of companies and then a shakeout. And five years from now the landscape will again look very different. In fact when you look back over just the history of computers, the top five companies at the beginning of any given decade usually three or four of them are different as you get to a new decade.

• MARGARET WARNER:

  On this merger itself, will it have trouble passing muster, do you think, antitrust-wise here or overseas?

• MARY FRAN JOHNSON:

  It's hard to imagine that it's going to have that much trouble because, of course, the two of them combined do have 70 percent of worldwide PC sales under their belts right now. And that is certainly something that the European Union will be concerned with. Compaq and HP are the number-one and -two suppliers in most of the countries overseas, especially in the Asia Pacific area.

  This often means less material in the supply chain and less choice, essentially, for some of the customers so there will be concern about that but I don't see in the U.S. or even globally that either of the companies has such a tremendous monopoly that it would be an antitrust concern.

• MARGARET WARNER:

  Finally, on the industry itself, do you… Is this… Are we at the point now where really the PC market is a mature industry, or is there still room for innovation? I mean, is the industry still changing? We read that at the 20th anniversary of the IBM PC I guess was last month that laptops are actually now for instance selling much faster than desktop models? I mean is there still change or is this pretty solid, secure kind of mature industry?

• MARY FRAN JOHNSON:

  The PC industry for a technology, for a whole family of technologies, is at a maturity point. And I do believe there will be lots more innovation, but the real changes will come more likely in wireless, in broadband to the home and the kind of services that… The things that people will want to do on any device that accesses information.

  It won't necessarily be a PC. It may be a hand-held. It might be an expanded screen is your cell phone. I believe technology always keeps leaping ahead. And the idea that the PC revolution is over, you have to realize that the Internet revolution has really just begun.

• MARGARET WARNER:

  All right. Mary Fran Johnson, thanks for being with us.

• MARY FRAN JOHNSON:

  My pleasure.