Learning the integration game

By CHRIS BARTON

A tip for Hewlett-Packard employees about integration: when the merger process is in full swing and you meet your new colleagues at the new company cafe, don't make jokes about how they take their beverages. As in: "Oh, is that what Compaq people drink? Whadarya?"

Above all, never say: "We don't do things like that around here. Remember we bought you, buddy, not the other way around."

Not so long ago this sort of advice - albeit in change management consultantspeak - was being bandied about the corridors of Compaq. The year was 1998, when Compaq bought computer maker Digital Equipment for $US9 billion, then closed six plants overseas and cut 5000 jobs - part of staff reductions that eventually totalled 17,000.

This time the boot is on another foot, with Hewlett-Packard planning to meld with Compaq in a $US25 billion share deal.

But the Compaq/Digital acquisition does provide an insight into how things might pan out. Like, who will get the top job in New Zealand - H-P's Barry Hastings or Compaq's Russell Hewitt? Based on past experience here, it should go to the dominant party in the share transaction.

But in New Zealand Hewlett-Packard has about a third of Compaq's staff numbers and the merger deal clearly has a friendlier feel about it than the more hostile Compaq/Digital acquisition.

Although Digital had three times the staff of Compaq, Compaq people got most of the plum positions, especially when measured as a ratio of the original payroll.

Then there's the question of redundancies. Inevitably, with 15,000 job cuts signalled worldwide, there are going to be some here.

But with Compaq showing growth locally and Hewlett Packard running a tight ship, job cuts here could be small. Compaq has 380 staff locally and Hewlett Packard 110.

Another harsh reality of mergers is that one and one is often less than two.

On paper the new HP looks set to become an IT giant, with $US87.4 billion in revenue. In NZ, the merged entity totals $575 million in revenue based on last year's figures.

But, as Compaq found six months after its acquisition of Digital, the sum of the parts can be less than the whole. Compaq's NZ revenues in 1998 were $240 million - about $8 million down on what they should have been.

The same was true of PC market share. On paper, the merger should have delivered 26.6 per cent market share. In 1998, it was 22 per cent. Today, it commands 23 per cent and with H-P's 13 per cent the new company should take a 36 per cent market share locally.

But the likely disappearance of the Compaq PC brand may provide opportunities for other companies and local PC assemblers.

A key reason for the merger is to create a company that can compete with IBM across its entire product line, including services - one of the few areas in the technology business that still offers decent sales margins.

In NZ, services was an area H-P was keen to move into, signalling in July its interest in acquiring the local operation of Texas multinational Computer Sciences.

The deal with Compaq clearly puts the CSC acquisition in doubt.

Compaq has an application software development centre in Christchurch that employs about 100 staff and its services revenue is around $60 million.

A final stumbling block to overcome is that the merger must be reviewed by US and European competition regulators. HP and Compaq say their main overlap, in personal computers, would not scare regulators and probably be approved in six to nine months.

Some analysts point out, however, that the combined firms' dominance in US retail sales could present a regulatory stumbling block.