Key Resellers Swing Behind HP-Compaq Merger

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Computer resellers, who account for the bulk of sales for Hewlett-Packard and Compaq Computer, have swung behind the controversial $25 billion merger between the companies, offering crucial support for the success of such an alliance, analysts say.

The channel initially questioned the deal, which was announced on Sept. 4. But now some 70 to 75 percent are comfortable with it, says Bicky Singh, CEO of Future Computing Solutions, a Yorba Linda, Calif.-based reseller with annual sales of around $85 million.

Other resellers called his estimates of support generous, although analyst Janet Waxman of technology research company International Data Corp. agreed that the trend is favorable.

Singh, who sells both Hewlett-Packard and Compaq products, expects to cut bureaucracy and costs by dealing with one firm. The product lines fit well, since HP is strong in high-end Unix computers, while Compaq is known for lower-end servers with Intel microchips running Microsoft Windows and for data storage technology.

Despite their contribution, computer resellers get little respect, and sometimes end up competing against the sales teams of the computer hardware makers they represent for business.

"There is this misperception that the channel is this bunch of low-life catfish that eat cadavers and they have no business to be alive," Waxman says.

But more than 50 percent of technology customers prefer to buy through consultant and other indirect channels, she says.

"We have seen companies that believed these partners are not important to their future, and they have failed," Waxman says.

Roughly speaking, HP wants to nearly double sales, to almost $90 billion, by acquiring Compaq, but if all the reseller partners jumped ship, HP sales would drop back to pre-merger levels. That is not likely in the worst of circumstances, but a slow erosion of support could cost the new company dearly.

Management and the founding families of HP differ sharply on the merged company's prospects. HP CEO Carly Fiorina says the merger would create a powerhouse in higher-margin services and high-end computing.

Merger opponents, led by HP board member Walter Hewlett, argue that the deal would drag the company into the unprofitable personal computer business and dilute the value of its printer business, an area of particular strength for HP. They say HP, at best, is paying too much for these assets, since Compaq mainly produces PCs.

Singh says HP and Compaq would also prosper if they spent less time beating each other down, as they are doing now.

"In these kinds of scenarios, Dell wins," he says.

If HP and Compaq merged, they would compete end-to-end with Sun Microsystems and IBM, Singh says.

But even some supporters cast the merger as a desperate move by two weak companies.

"I think it was more on the survival side," says one consultant who works closely with Hewlett-Packard, who believes the deal would expand his business opportunities.

HP Tuned In To The Channel

At the same time, the tough work would be integrating the two sprawling companies, the consultant says.

"There is going to be a lot of confusion for quite a while," he says.

The biggest potential source of confusion and danger for the resellers would be if the sales force from the new HP began competing with its own channel for business. HP found itself in exactly that position a few years ago and managed to lose about half its partners, Waxman says.

But HP appears to have stopped defections, and some Compaq partners say they are eager to do business with it.

"I'm being solicited by HP folks quite a bit since this has happened," says Don Richie, CEO of Austin, Texas-based Sequel Data Systems, which works exclusively with Compaq and has $15 million in annual revenues. "The Compaq folks, they are clueless. They are absolutely clueless."

Compaq still treats its partners selling high-end equipment as if they were selling the simple PCs for which Compaq is known, Richie says.

Some fear that HP, which has lauded Compaq's direct sales experience, might try to apply that to sales of high-end computers that the companies see as a strategic driver of the deal.

But Kevin Gilroy, HP's general manager of North American commercial channels, says his company is committed to the indirect model for its most expensive hardware. The channel is "absolutely key to our business," Gilroy says.

"I wouldn't kid you that this level of epochal change doesn't generate some consternation and some rumination, but I think when they [resellers think it through, they in general are very, very positive about it," he says.

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