ANALYSIS: MEDIA WATCH - Hewlett-Packard - Compaq merger met withnothing but disdain

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


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