Compaq/HP Hairball

When the economy is weak, the game becomes one of who can steal market share. That's why Hewlett-Packard Co.s (NYSE: HWP) proposed $25 billion acquisition of Compaq Computer Corp. (NYSE: CPQ) will make unsettling reading for EMC Corp. (NYSE: EMC) today (see Hewlett-Packard, Compaq Merge).

In storage terms, the merged organization has a giant business. Analysts estimate the combined revenue of the two companies’ enterprise storage groups to be more than $6 billion. That puts the new entity on a par with EMC in revenue terms (see EMC Hammered), as well as presenting a significant challenge to IBM Corp. (NYSE: IBM), Sun Microsystems Inc. (Nasdaq: SUNW), and Dell Computer Corp. (Nasdaq: DELL), all vying for slices of the storage pie.

“Their competitors must assume that together these two companies represent a much more formidable challenge than apart,” says Harsh Kumar, analyst with Morgan Keegan & Company Inc.

EMC officials were unfazed by the news. “This announcement is really no new news as far as storage is concerned,” says Michael O’Malley, an official spokesperson at EMC. “There’s no new products, no articulated vision, no specific strategy. In fact the only thing that is new is the confusion created for the customer.”

And it would seem that there's an element of truth in this. Firstly, HP resells Hitachi Data Systems’ high-end storage arrays, whereas Compaq builds its own to address this market. Then Compaq resells Shark, Big Blue’s high-end storage array, while IBM resells Compaq’s Storageworks mid-tier RAID arrays. Under the new regime it’s not yet clear which of these OEM deals still makes sense, or what it all means for customers.Then there’s HP’s $350 million acquisition of StorageApps to consider (see HP Acquires StorageApps).

This was a recent move by HP into the virtualization market, whereas Compaq has been building its own virtualization product for some time. (see Virtual Reality?). "This could be a chance for Compaq to dump its late-to-market, largely unworkable product,” says one analyst who requested anonymity.

“Does FSAM and ENSA become ENSPAZ?” asks Steve Duplessie, analyst at the Enterprise Storage Group Inc.. FSAM or Federated Storage Area Management is HP’s umbrella architecture for its storage products, while Compaq’s is ENSA or Enterprise Network Storage Architecture.

”Resolving existing product overlap, OEM arrangements, and channel issues will be quite an endeavor for this new company,” says Dan Tanner, analyst with the Aberdeen Group.

Aside from technology and product integration issues, the merged organization must combine 70,000 employees in more than 160 countries, which is likely to mean significant layoffs. And although the top brass appear to be in place -- five Compaq board members will join HP’s board; Carly Fiorina will be CEO of the combined company; Michael D. Capellas, Compaq's chief executive, will serve as president -- how the rest of the organization will shape up is far from clear.“We don’t know whether Mark Lewis, currently the VP and general manager of Compaq’s storage business, will head up the new storage group, or if he will he work for Nora Denzel, VP and general manager of HP’s Network Storage Solutions Organization,” says one confused employee at Compaq’s storage unit. “For what its worth, we think Lewis will go, which is an unsettling thought."

It’s clear that before the new company can assume any advantageous position against its rivals it must first sort out this hairball of integration issues. Fiorina herself conceded on a conference call with analysts that Compaq and HP still have much work to do in services, software, and storage, before the new company can work in real life. And that’s assuming the SEC approves the deal, which may provoke antitrust concerns.

Under the terms of the deal, HP would swap about 0.63 of a share for each share of Compaq. In morning trading Tuesday, shares of Compaq were up 0.40 a share (3.2%) at 12.73, while HP's stock fell 2.15 (9%) to 21.06.

— Jo Maitland, Senior Editor, Byte and Switch http://www.byteandswitch.com