If at First You Don’t Succeed

Fortunately for HP, its first multi-billion dollar gamble — the offer for PricewaterhouseCoopers(PwC) — never saw the light of day. It would have paid $18 billion for assets that could have easily walked away. On this go-round, HP’s $25 billion offer for Compaq would net some real products, many of them complementary to HP’s offerings.

At first glance, the deal offers some real plusses. Compaq’s strong storage business provides the branded solution and margins so badly needed by HP’s server lines. Meanwhile, HP’s industry-leading printing and imaging business gives Compaq’s PC line a key advantage over Dell. And of course, we’ve all heard over and over again about the “chance” coincidence that both companies have decided to bet their futures on Intel’s 64-bit Itanium.

But the deal falls short in one key area: services. While both companies have sizable services divisions, much is in low-margin support, not the lucrative consulting and integration business. HP’s Fiorina pointed out that, yes, support operations do get you in front of the customer. But they don’t necessarily land the face-to-face meetings with top management-the folks who spend the real bucks.

Assuming all the antitrust hurdles are met, the next step-integrating the organizations-remains an obviously messy agenda item. Compaq’s troubles in large part suffered from a lack of focus following its Tandem and Digital acquisitions. Meanwhile HP has yet to show any momentum from all the cultural changes that have been mandated from the top over the past year. So why not add yet another round of reorg to blunt the pain of all the previous exercises?

The deal looks to us like a circling of the wagons: a merging of also-rans in the server, desktop, and services businesses. The result might be a company almost as big as IBM, but in our eyes, hardly as profitable.