User doubts rise over HP, Compaq

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By Lee Copeland

(IDG) -- The melodrama surrounding the proposed merger of Hewlett-Packard Co. and Compaq Computer Corp. is leading some users to re-examine their relationships with the two vendors.

A tense proxy fight looms, as HP and Compaq last week vowed to proceed, despite opposition to the deal from the heirs of both the Hewlett and the Packard families, who control a total of 18 percent of HP's stock (see "Does Compaq have a backup plan?" link below). Users may not know until February whether the merger will be approved by shareholders of the two companies.

That may not be soon enough for Garrettsville, Ohio-based Therm-O-Link Inc. The supplier of cable and wire started looking for a new server platform after HP last month announced plans to phase out its HP e3000 system. But it's leaning against a switch to the HP 9000 Unix server, said Jim Johnson, systems manager at Thermo-O-Link.

"I'm having a hard time trying to figure out what HP's core business is, and they haven't communicated that clearly," Johnson said. "I can't bet the company on a 9000 server that they may discontinue in nine months." Instead, he added, hardware from IBM or Dell Computer Corp. is at the top of his evaluation list.

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Seven other users also said the continued uncertainties surrounding the planned merger are a cause for concern. John Moon, CIO at Baxter International Inc., said he wants the controversy to be resolved quickly because it's hard to determine which products will be supported by the combined company, or by either HP or Compaq should they go their separate ways.

"We've been stung in the past and [again now] with the economic downturn, so we spend a lot more time trying to understand how our key suppliers are positioned in the market," said Moon. Baxter, a $7 billion medical services company based in Deerfield, Illinois, buys its laptops, desktops, servers and help desk services exclusively from Compaq.

Webb McKinney, president of business operations at HP, reiterated that the merger would strengthen the ability of the two vendors to serve large customers. "The remaining 82 percent of shareowners have not made preliminary statements as to how they will vote," he added.

But Paul McGuckin, an analyst at Gartner Inc. in Stamford, Connecticut, said the battle between HP's management and members of the Hewlett and Packard families will make swaying the institutional investors that hold 57 percent of HP's stock much more difficult.

McGuckin also cautioned users about making investments in Compaq's Tru64 and OpenVMS operating systems and HP's midrange storage products, which might not survive if the merger goes through. "It's not a compelling story for users," he said.

Winning shareholder and regulatory approval for the merger presents as many potential problems as scrapping the plan would.

For starters, antitrust concerns by the Federal Trade Commission may force HP and Compaq to sell overlapping high-end server lines. Some users are worried about investing in technology that might get divested.

"Users need to have a contingency plan, regardless of the outcome of the merger," said Rob Enderle, an analyst at Giga Information Group Inc. in Cambridge, Massachusetts. "In the current environment, we're dealing with a risk-averse audience, and they don't want to put their jobs on the line for a company that may not be able to execute."

According to a Giga survey last week of IT executives who are currently purchasing technology products, about one-third said they wouldn't buy HP or Compaq products due to merger concerns.

"If the merger goes through, HP will grow by sheer size, but they're just gaining bulk," said Steve Willard, plant manager at Spectra American Color Lab Inc. Willard said Sun Valley, Calif.-based Spectra is contemplating a move from Compaq's AlphaServers to hardware from IBM or Mountain View, California-based Silicon Graphics Inc., due to concerns about the merger and Compaq's planned transition of the machines to Intel Corp. processors.