Computer giants Hewlett-Packard and Compaq have long been looking
to diversify into the $600 billion IT services industry, but the
announcement that Hewlett-Packard would merge with Compaq, combining the
third and second largest PC makers, seemed to catch everyone
The proposed deal would be the biggest in the computer sector's history
and would create a company valued at $87 billion.
Coverage of the deal was dominated by Wall Street's unmistakable
Hewlett-Packard suffered its worst session since the 1987 crash, and
even Compaq (widely viewed as being acquired as opposed to being a
merger partner) saw its stock fall in the aftermath of the
Even the premium Hewlett-Packard had offered for Compaq's shares
disappeared in the first day's trading following the announcement. CNN's
Lou Dobbs (September 4) introduced a story on the topic by reporting,
"Take one enormous, poorly performing company and combine it with
another enormous, worse performing company. Investors didn't seem to
appreciate the logic."
The Los Angeles Times, the San Jose Mercury News and The Washington Post
(September 5) all wrote that the deal smacked of "desperation."
Commentators suggested the deal was evidence that the two companies had
realized the PC industry was past its peak growth years, and that the
deal was a sign of weakness in the industry.
In a news conference, Hewlett-Packard (whose corporate agency is Applied
Communications) and Compaq (Hill & Knowlton) both touted the
cost-cutting benefits the deal would present. Their figures said the
union would amount to 15,000 job cuts immediately and the savings would
total $2.5 billion a year by the third year of the combined
operations. But the rationale was lost in a sea of criticism as Wall
Street and the press ripped the deal.
There was frequent mention of how the two companies would have
difficulty integrating, and concern that the process would take a
considerable amount of time given the size of the two companies and
their overlapping product lines. Others worried that the process would
distract from the primary goal of gaining market share in either the PC
or services sectors. A financial analyst told the San Jose Mercury News
(September 5), "The weak link in all of this is execution. We don't have
a precedent of a tech merger of this size being successful. This has all
the makings of a disaster."
The goal of expansion into the high-margin services sector was often
noted, but coverage more often reflected widespread doubt that the
combined company would be a strong competitor in this arena. A JP Morgan
analyst bluntly told The New York Times (September 5) that this goal was
a "pipe dream."
The bottom-line reaction to the deal appeared to be that the merger
didn't make the combined company a formidable competitor against either
Dell in PCs or IBM in global services. In fact, shares in the two
competitors gained ground on news of the merger.
The negative media reaction to the deal might see either Hewlett-Packard
or Compaq shareholders block it, according to reports. One analyst told
CNN (September 5) that HP needs "a big PR campaign" to promote the
benefits of this deal, with Citigate Sard Verbinnen assisting HP. Since
support for the deal outside the two companies is practically
non-existent, it is unlikely a PR campaign would help.
Evaluation and analysis by CARMA International. Media Watch can be found