Due Diligence: Merging Standards

By Eric Nee  |  Posted 05-14-2002 Print Email
Does the HP/Compaq merger matter? Not much, says columnist Eric Nee. But it is a sign of the times, and of more megamergers to come in the IT industry.

The merger of Hewlett-Packard and Compaq Computer has created more hubbub than any merger in the history of the IT industry. HP CEO Carly Fiorina and her cohorts crisscrossed the country exhorting shareholders to vote for the merger, while key shareholder Walter Hewlett followed behind, encouraging fellow shareholders to vote the deal down. The campaign is now over, and Hewlett has thrown his support behind the deal, although the Securities and Exchange Commission inquiry into the dealings between the Fiorina camp and major shareholder Deutsche Bank Asset Management continues.

To fuel their arguments, Fiorina and Hewlett trotted out survey after survey of HP and Compaq customers, each purporting to support their side. Fiorina's surveys showed that customers support the merger because it would make HP a stronger competitor with more money to invest in customer support and new technologies, while Hewlett cited surveys showing customers are opposed to the merger because it would cause too much turmoil and probably fail, like so many other large mergers in the computer industry.

The dirty little secret is that for many of HP's and Compaq's customers, the merger simply isn't that big a deal. "Ninety percent of what they produce are commodities. As long as the supply isn't disrupted, who cares?" says John Parkinson, chief technologist of Cap Gemini Ernst & Young and a member of CIO Insight's advisory board. "If you had surveyed CIOs, they would have said, 'If I can't get it from HP or Compaq, I'll get it elsewhere.'"

Oh, there will certainly be turmoil as the two companies are mushed together: Overlapping product lines will be killed, trusted sales and support people will be reassigned, and contracts will be renegotiated—with the attendant risk all that brings to both companies' current businesses. And for the few businesses that are still dependent on one of the firm's aging proprietary computer platforms, life could get painful if HP decides to phase any of them out.

But for most customers in most situations, it will be business as usual, whether or not the merger goes through. That's because the bulk of what HP and Compaq sell today can be easily bought from any number of sources. Take printers. HP is by far the largest printer company in the world, but customers know they can go to Lexmark or Canon and buy printers that will be up and running in no time. Same with personal computers. Dell Computer is itching to pick up any customers that feel slighted by a combined HP/Compaq, and it's relatively simple to swap out one laptop for another. It's much the same with Windows and Linux servers. One vendor's products are just as good as another's, and all of them run virtually the same software. Even high-end servers are becoming more and more interchangeable.

That wasn't always the case. When Sperry and Burroughs merged 16 years ago to form Unisys, customers had few choices but to stay with the new firm, even if they didn't like the deal. That's because their computers, data storage, networks and applications were so tightly coupled to the vendor's proprietary architectures.

Today, that's no longer true. Most businesses have adopted off-the-shelf enterprise applications from vendors such as SAP and PeopleSoft, running on standard databases from vendors like Oracle and Microsoft. If a customer using a high-end Compaq or HP server wants to move to a Dell, Sun Microsystems or IBM platform, it may take some effort, but it's certainly doable. And new application server software from companies like BEA Systems or IBM is giving customers even greater independence from the underlying hardware and software.

Ironically, the move to vendor independence is going on inside HP itself. A few years back, I spoke at an IT conference sponsored by Fortune and the Stanford University Graduate School of Business. At the conference, a team of HP managers talked about how they were substituting all the customized applications the company had accumulated over the years with off-the-shelf applications requiring little or no customization, and running on standard databases and servers.

The move to standard platforms is taking place in the networking and storage arenas as well. Cisco Systems made its mark by providing multiprotocol routers that could handle data traffic from all sorts of proprietary networks. Today, a few specialized applications such as interbank transactions run on proprietary networks, but the bulk of networks have moved to the TCP/IP protocol—the Internet. The same goes for storage. In the past, nearly all storage was directly attached to the server, limiting the options available to customers. If you bought a Sun server, you had to buy a storage system designed specifically to work with it. With the move to network storage, be it a storage area network or network-attached storage, customers have much greater flexibility in swapping out vendors.

The long-term trend in the IT business is toward standard platforms, be they servers, databases, storage, networks or applications. And it's that very trend that is driving the HP/Compaq merger. It is also what will drive future mergers in the IT business. If a vendor can no longer lock in customers with proprietary technology, they'll have to find other ways of keeping them happy.

One of the key ways vendors can keep customers is to get big, because with size comes efficiency. Sheer size gives a vendor more sales and support offices throughout the world, better prices and delivery from component suppliers, stronger new-product development, large-scale advertising campaigns, and the ability to acquire companies that fill in any gaps it might have in its product and service offerings.

In today's information technology world, size matters. As the IT business matures, it is looking more and more like the automobile business: a handful of very large global companies that dominate the business, supported by extensive networks of much smaller niche firms.

At the height of the Internet boom, when customers were buying technology at unprecedented rates, it seemed there was room for all the thousands of tiny vendors that sprang up. But that's all come crashing down. What we have left are a bunch of small companies that are no longer sustainable. "You've got a lot of private companies that are having a hard time selling to CIOs," notes Steven Milunovich, a global technology strategist with Merrill Lynch. Many of these small firms will simply fade away, while others will be bought by larger firms. Once stock prices stabilize and customers start buying again, probably in 2003, we're likely to see a significant uptick in M&A activity, Milunovich predicts.

It's not just the myriad of small IT vendors that face tough times. Even large firms are finding it difficult to compete in this new world—and thus the HP/Compaq merger. If these two giants think they need to merge to survive, others are also at risk. Gateway is an obvious candidate, but even a firm as big as Sun will be under pressure. Sun's recent decision to begin selling Linux servers, itself another indication of the move to standards, puts it in direct competition with much larger competitors, such as IBM, that can offer the same system at a much lower cost.

The good news for business is that the move to standard platforms makes it much less pain-ful to manage the product transitions engendered by all these mergers—so long as CIOs plan for this likelihood. "Today the CIO's real job is to pick an open architecture and then pick the best of breed at the time," says Howard Anderson, founder of The Yankee Group and now with YankeeTek Ventures. By all indications, that's exactly what most CIOs have been doing. Ironically, this is the very thing that's fueling mergers like the one between HP and Compaq in the first place. Call it the yin and yang of IT.


ERIC NEE, a longtime observer of Silicon Valley, has served in a variety of editorial positions at Forbes, Fortune and Upside magazines. His next column will appear in July. Please send comments on this story to editors@cioinsight.com.



 

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