HP-Compaq Redux

Many of the most senior professors I’ve ever met — including some prize-winning engineering professors I interviewed in my research — say that to really understand something that you need to teach it.

Tonight in the capstone strategy class, our undergraduates revisited the 2002 HP-Compaq merger. We had a very healthy discussion, which I concluded by summarizing from my “Carly is right, I was wrong” posting earlier this year, particularly this passage:

• Opponents’s Claim: The merger would increase HP’s exposure to the commodity PC industry. Reality: True.
• Supporters’s Claim: The merger would give HP’s commodity business cost advantages through superior scale. Reality: True. Under Hurd, HP is a better commodity PC maker than even Dell.
• Supporters’s Claim: The merger would help HP increase service revenues. Reality: False. What was left of DEC wasn’t worth much, and so in 2008 HP spent $14 billion to buy EDS.
• Opponents’s Claim: Adding Compaq would dilute HP’s printer cash cow. Reality: True, but it didn’t matter.

However, from the student presentations I gained a few new insights:

• Many “experts” (including me) say that prior IT mergers failed and thus HP-Compaq would fail (cf. WSJ, CNET, USA Today, AP, Red Herring.) However most of the acquired companies were clear losers (Apollo, Sperry, NCR) or firms whose category was dying (Cray, DEC). Compaq was the global market share leader from 1994-1999, and still had almost twice the share of HP.
• HP didn’t beat Dell in PCs, Compaq did (using HP’s money, brand and distribution). HP was never any good at making PCs.
• As my student David Sheyman pointed out, at the time of the merger Compaq’s ProLiant servers were the market leader, preferred by IT buyers.

Yes, the PC business is a brutal low margin commodity business, but if nothing else HP deprived Dell of a profit sanctuary for attacking HP’s other businesses.

Consistent with one of major themes of this blog, commoditization is the reality of most segments for Silicon Valley IT companies. Commodity firms are less fun to work to work for, so students have to recognize the industries and firms that have become commoditized if they hope to avoid them.