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October, 2001 FRONT END |
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Master
File CHANNELS Politics
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Will an IS manager gain from HP-Compaq mega union? It all depends on how the combine stacks up against IBM and other 'S' companies-those dealing in servers, services, software and storage. By Atanu Roy with Indrajit Basu and R. Srinivas Last month, Carly Fiorina, chairman of Hewlett-Packard, announced her company's intention to buy out Compaq. The acquisition catapults the merged entity close to the world's number one IT company, IBM. In India, it would be the largest systems vendor and the third largest IT group, after HCL and the Tatas. The size would definitely help the new company in, for example, negotiating better rates with suppliers. But is the increase in size alone sufficient? Are there also complimentary strengths, which are going to add value? Can the new entity compete head on with computer behemoth IBM in providing servers, software, storage and services? Both HP and Compaq India chiefs preferred not to comment. "It will take another 6-8 months before a clear strategy is evolved... For us, it is business as usual," says HP (India) president Arun Thiagarajan. Compaq India chief Balu Doraisamy echoes the same sentiments, "Until the merger closes, Compaq and HP will continue to compete with each other as with our other competitors. We have obligations to our customers and shareholders." Compaq has anyway outlined a shift in focus to software and services. HP has also been under earnings pressure, aggravated by the slowdown. Fiorina, who is expected to run the combined entity, therefore, says, "It all looks great on paper, but none of it will matter if we can't integrate successfully in a difficult environment." And the viability of the new entity would depend on what it offers as product and technology roadmap. Server synergy The HP-Compaq merger immediately makes sense in one area: Consolidating the two firms' respective server designs and strategies. Both companies are moving to a single mainstream technology based on the Itanium processor family. Both have significant investments in open systems such as Linux. And server sales typically open the door to consulting contracts, storage system sales and software licenses. Both also have complementary constituencies and strengths. Compaq's expertise in telecom, high-performance computing and fault tolerance for mission-critical businesses matches well with HP's knowledge of ERP, and Oracle and SAP systems. That doesn't mean there aren't potential problems. The joining of two huge companies that were former competitors will produce many friction points. For example, HP's Superdome versus Compaq's AlphaServers, HP-UX versus Tru64-and the list goes on. The new firm would also have to worry about customer loyalty and minimising the costs of migrations and upgrades from its former incarnations. Towards that end, Gartner believes that HP CEO Fiorina and Compaq CEO Michael Capellas must address not only the external organisational issues of a merger, but also the internal migration and consolidation issues. This means HP would dictate the design of enterprise servers, resulting in faster extinction of the AlphaServer, and in Itanium processor family upgrades. Compaq would possibly drive Proliant branding in the midrange, sacrificing the HP NetServer line. System software battlegrounds would sacrifice Tru64 to HP-UX but would attempt to salvage Tru64 clusters. But HP and Compaq can't just dump willy-nilly those projects that don't fit into the long-term strategy: High-end customers demand that servers be supported for years after they're purchased. Unless HP and Compaq can assure customers of investment protection, Gartner says that the new HP will struggle for at least three years after becoming a legal entity.
"HP has already announced the end of its PA-RISC line, and Compaq has palmed off Alpha to Intel. If you're an IT executive with an installed base of Compaq servers looking at a Compaq proposal, I doubt whether you'd sign it today. When two losers come together, they hardly make a winner," Bhaskar Pramanik, managing director of Sun Microsystems India, told CT. For HP-Compaq a key to retaining customers will be to provide a clear map of where technology is headed. Stress on services In the computer industry, sometimes it's more profitable to sell services, not boxes. Companies like IBM, HP and Fujitsu are best known as hardware producers, but behind the scenes they do everything from setting up corporate data networks to handling consumer inquiries. The industry, however, remains quite fragmented: The $33 billion (Rs 1,57,670 crore) in revenue of the largest player, IBM's Global Services division, accounted for just 5 per cent of the total computer services market. Second-place EDS had $19.2 billion (Rs 91,738 crore) in revenue, or 3 per cent of the market. The history is pock-marked too. For instance, in 1998, Compaq bought Digital Equipment Corp. for its big services group, but lost key executives and failed to gain. Compaq Global Services revenue fell to $6.99 billion (Rs 33,400 crore) in 2000 from $7.16 billion (Rs 34,210 crore) in 1999. HP has long been trying to improve its services business. It failed last year to close a deal to acquire consulting firm PricewaterhouseCoopers and since then has been emphasising on smaller partnerships with Accenture and PwC. The merger now creates an in-house consulting group, but it's dwarfed by IBM's. In their most recent quarters, IBM received $8.7 billion (Rs 41,570 crore)-40 per cent of its total revenue-from consulting services, while HP received $1.8 billion (Rs 8,600 crore), or 15 per cent of its total revenue, and Compaq had $1.7 billion (Rs 8,130 crore) from services, or 20 per cent of revenue. However, the services revenue from HP and Compaq chiefly derives from low-growth hardware support jobs, not the more profitable consulting contracts IBM often signs with companies that want to revamp their computer operations. The combined company will need to invest more in consulting. An open view In counting the marbles, most industry watchers are overlooking OpenView, HP's banner product in the $20 billion management software market, which already ties together disparate products from HP's product line. New enhancements mean it can be extended to Compaq products, better joining the two companies' product lines and letting OpenView piggyback on Compaq's heavy presence in the Windows server market. For the IS community in India, assurance on computer services is vital. So is the availability of price-performer servers and storage systems, topping with a robust network management application. The task would, however, be to assure customers about investment-protection. Says Martin Hutchinson, a US-based expert on global IT M&A, "The combine's Indian prospects look particularly good as you could in theory get a situation where the HP-Compaq entity in the country, with its strong market share, could be one of the few healthy sectors of the overall HP-Compaq combine." In other words, India could be the healthiest bit of the new company. But, for now, corporate customers are keeping their fingers crossed. |
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