BY MICHAEL SWENSON · IDC
February 10, 2003 | One of the major IT developments of the past year was the acquisition of Compaq Computer Corp. by Hewlett-Packard Co. — hotly and publicly debated by shareholders right up to the final hours before the vote. Once the deal was approved, the difficult work of rationalizing product lines and service offerings, coordinating R&D labs, integrating back-office functions, and training the customer-facing side of the organization kicked into high gear.
If the "new HP" can execute this complex integration so it preserves customer loyalty and capitalizes on the combined strengths of HP and Compaq, the company could become the leading systems provider for life science applications.
The latest financial results for HP show that at the companywide level the acquisition appears to be working. The combined revenues of HP and Compaq in Q4 2001 were $18 billion, and in Q4 2002 they came in at $18.2 billion while also improving operating margins. The analysts in IDC's Life Sciences practice have been particularly keen to understand how the merger would affect HP's efforts to serve the needs of pharma and biotech companies, as well as research centers and academic institutions.
Historically HP and Compaq had different strengths in this market. HP was strong in Big Pharma product development, manufacturing, and back-office functions. Compaq was well known for its high-performance line of AlphaServers, mostly used in basic research and drug target discovery. Compaq also fielded a high-profile professional services group dedicated to the life science market. Theoretically the two companies appear to be a good fit to serve this niche, each filling some of the gaps left by the other. Conversations with HP managers in the life science area suggest that the company is working hard to integrate these strengths into a cohesive business unit. However, history teaches us that theoretical synergies often fail to materialize in large mergers and acquisitions.
IDC has had an opportunity to gauge the synergy. In an end-user survey this past year, we asked pharma, biotech, and academic customers a series of questions about their perceptions of which company delivers the best in a wide variety of attributes for servers and storage. Because we started collecting data right after the Compaq acquisition was finalized, we allowed respondents to answer separately for the Compaq and HP brands.
Examples of attributes we asked about included: ability to cluster systems, compatibility with installed systems, main memory capacity and expandability, price/performance ratio, application performance, and system manageability. We asked respondents to rate the importance of each attribute to their own purchase decisions, how satisfied they were with that attribute on their largest current system, and which vendor was currently best at this attribute. It is this latter series of questions that shed the most light on the potential for the HP acquisition of Compaq.
|We Can Work It Out
|HP CEO Carly Fiorina says the company expects to successfully complete the corporate integration of Compaq and achieve $3 billion of annualized cost savings by the end of fiscal year 2003, one year ahead of schedule. At December's Securities Analyst Meeting in San Francisco, HP executives told shareowners that the computer giant has already achieved $2.4 billion of annualized savings — 80 percent of the targeted $3 billion of total annualized savings.
Out of a list of 17 attributes, Compaq or HP on its own achieved a first- or second-place rating four times. However, if we treat the two as a combined brand, adding the percentage of respondents who viewed HP as the best to the percentage who said the same for Compaq, the new HP achieves a first- or second-place rating on 14 of the 17 attributes.
This brand perception data suggests that HP has the opportunity to achieve a very strong position as a leading vendor (if not the leading vendor) of servers and clusters in the life science market. However, to do so requires capturing most of the brand loyalty and respect that Compaq had among users in this market segment. A second possibility is that the combined brand potential will never be realized and HP will settle into the second tier of server vendors for the life sciences.
The third possibility, and in my view the most likely, is that HP will gain some market share through the Compaq acquisition, but the combination of lost momentum during the heat of the takeover, some customer dissatisfaction with the decision to stop advancing the high-performance Alpha processor, and an almost inevitable loss of focus on the customer while going through corporate integration will constrain HP from achieving the highest possible gains in server market share.
Ultimately it is the readers of Bio·IT World and their peers who will decide how this acquisition plays out in the life sciences. When the HP sales rep walks through your door, does he or she have a coherent story about what HP is doing today and where it is headed tomorrow? Does the sales rep understand your particular IT needs, and offer high- quality products at a competitive price, with a compelling service plan? Only customers can ultimately decide the answers to these questions, and they'll vote with their purchases.
HP is now in a position to execute its post-acquisition strategies. The next few months will be critical as to whether it can capitalize on its potential benefits in the life science market. We will observe with interest.
Michael R. Swenson, a senior research analyst at IDC, can be reached at firstname.lastname@example.org.