HP/Compaq: Solution Providers Will Cast the Real Vote

gether or solo, neither company is going to have an easy time of it going forward given the current market conditions in the IT industry. No one could have expected that a proxy fight would have erupted or that the entire process would resemble a bitter political campaign. One prominent magazine publisher went so far as to write a column backing the deal, telling his readers "Vote Carly," as if it were a presidential campaign.

Obfuscating the real issues was an intense ad campaign, the most famous of which was the Flip-Flop ad that attacked HP board member Walter Hewlett. (Notice the subtle difference between calling him a board member vs. dissident board member.) If you missed the ad, it featured, among other things, a very weak juxtaposition on Hewlett's comments about HP's planned acquisition of PricewaterhouseCoopers. They had him "reportedly" supporting the deal on the flip and saying he was not "keen" on the deal on the flop. One top distribution executive said he believed the ad backfired on HP. I couldn't agree more, but in the end it was the best thing to have happened to high-tech advertising since Apple's Big Brother campaign.

But after the dust has settled and the ad campaigns have ceased, solution providers will find themselves in a powerful position as regards HP and Compaq. If the deal goes through, solution providers will have to sort though the integration and migration issues for their customers because some products will be eliminated. Another issue is whether VARs should remain partners of the combined company but diminish their dependency by increasing their business with other vendors. That issue is weighing heavily on the minds of many channel executives, with some getting much cozier with IBM, for one. For instance, IBM is looking for partners to sell its iSeries server line into former HP 3000 accounts, an opportunity worth exploring. On the flip side, if the deal is defeated, partners would have to help both companies reverse their fortunes.

Some of those solution providers might want to read a very thorough analysis of the proposed merger by two Sanford Bernstein analysts, who say the combination is a bold move but "not strategic enough and too risky." Sanford is owned by Alliance Capital, which is voting in favor of the deal. One of their chief issues is that the deal would skew the HP portfolio more toward commoditized PCs and leave the enterprise computing business "stuck in the middle." They also aren't buying HP's claim the deal would help propel it into the big leagues in services. It just won't leapfrog "ahead of its current rivals" like IBM Global Services or EDS, the analysts contend.

Some of their analysis includes the following:

• We have heard it 100 times, but their research plainly shows such large mergers and acquisitions just don't work. They state for the record that even HP's purchase of Apollo and Verifone were "indisputable failures." Of particular concern is HP's attempts to reduce its workforce by 15,000 while integrating disparate products and platforms.
• If you are an HP or Compaq solution provider, you should be worried, these analysts claim, because as both firms focus on Intel's 64-bit architecture, it will be stuck between low-cost offerings from Dell and high-end offerings from Sun. But they leave IBM out of the equation on the high end and fail to mention Sun's problems in gaining momentum for hardware sales.
• A critical point for the channel is too much of their business could be tied up with one vendor. Retail domination aside, when it comes to mission-critical systems, such as the outgoing Alpha or HP-UX, you and your customers might migrate to Sun or IBM.
• Those who believe the recent positive recommendation of Institutional Shareholder Services (ISS) will affect the outcome should think again. Most shareholders will not delegate their vote to ISS, the analysts believe. And I must agree here. There has been an overwhelming amount of analysis that will assist shareholders,with ISS' point of view just being one factor.
• No matter, the real voting will take place after the scheduled March 19 vote by solution providers who will ultimately decide the fate of the combined entity.
• What do you think? Let me know at [email protected].