Hewlett-Packard, Compaq face challenges in merging

By Jon Swartz
USA Today

SAN FRANCISCO — Getting Hewlett-Packard and Compaq Computer shareholder support might be the easy part.

Compaq shareholders yesterday, by a margin of 9-to-1, approved the $20.2 billion merger, a day after HP declared a "slim, but sufficient" victory. An official tally will take weeks.

If the votes hold up — paving the way for the PC industry's biggest deal — the companies will merge under some of the most difficult circumstances imaginable, merger experts say.

The paper-thin margin isn't a ringing mandate for the deal's chief architect, HP leader Carly Fiorina. And the divisive nature of the fight has led to employee angst and customer uncertainty.

"Merging these enormous organizations is eminently more difficult" than gaining shareholder approval, says Duane Weeks, a former Compaq executive and HP consultant.

Among the potential pitfalls:

• Morale and productivity. Faced with at least 15,000 merger-related layoffs, anxious HP and Compaq workers could "go into a protective shell," and productivity will plunge, says Jim Jeffries, chairman of M&A Partners, a merger-and-acquisition adviser. Others might defect to competitors.

• Revenue dip. HP predicts a 5 percent decline in revenue at the merged company. But Jeffries and deal opponent Walter Hewlett expect a 10 percent to 15 percent drop in the first 12 months. Jeffries says it could take three to five years for HP to return to current annual revenue, casting more doubt on the deal during a tech downturn.

• Tough decisions. If HP expects to whack $2.5 billion in annual expenses, it will have to "slash and burn" plants, distribution centers and call centers, says Weeks, a former vice president of supply chain at Compaq. The disruptions could have a further impact on productivity and hinder the company's hopes to replicate Dell Computer's efficiency.

• Consumer confusion. Buyers could go elsewhere if certain HP or Compaq products are eliminated or if new rollouts are delayed.

• Turf wars. Combining Compaq's go-go culture with HP's methodical approach will be "like putting together oil and water," Weeks says.

HP and Compaq have assembled a 900-person integration team to iron out the merger's details. The merged company would implement the plan within a week of the merger's close.