Martin Reynolds

1
The Hewlett-Packard/Compaq Merger Picking the
Winners and Losers

• Martin Reynolds
• Paul McGuckin

2
Critical Questions

• Why did they do it?
• Will the deal complete?
• Can HPQ improve profitability?
• Will service suffer?
• Can technology win?

3
Why Did They Do It?

• Scope, breadth, and scale
• No. 1 player in many segments
• But broad overlaps in products and geographies
• Synergy in high-volume servers
• Cost-cutting opportunities in PCs
• Critical mass in services
• But redeployment needed
• Software leverage breadth and scale
• Seen as admission of weakness
• Question of trust investor employee customers

4
Will the Deal Go Through?

• Board, Management full support
• Stock price not a factor
• Stockholders doubters have sold
• Regulators issues are manageable
• U.S. retail share 70 percent
• European markets
• Corporate raiders possible risk
• Great risk to both businesses if deal collapses

5
Can HPQ Improve Profitability?

• Printers 20B 1 Strong
• Access 30B 1 Under siege
• Infrastructure 20B 1/2 Flat (IANT OK)
• Services 20B 3 HW driven
• Servers and services are the strategic areas
• But massive overlap
• Revenues flat to down
• Gentle retreat from unprofitable deals
• Aggressive cost reductions required

6
Will Service Suffer?

• Brands both promise support and transition
• Will place service above profit (0.8 probability)
• Risk to non-open platforms in the long term
• HP/UX Itanium WinXP clear survivors
• History of outstanding migrations
• Vax to Alpha
• 68000 to PA-RISC
• Itanium migrations as good as or better

7
HPQ Product Directions

• Printers no change, all HP
• PCs Either one but not both
• Handhelds Jornada, iPaq synergistic iPaq brand
• Servers HP/UX with Tru64 add-ons
• NSK Tru64 OpenVMS MPE all support only
• Strong transition tools
• IANT a strong point
• Dell a threat
• Services full merge

8
Printers The Cash Cow

• Bottom Line
• Underwrites profit for HPQ
• HP printers displace Compaq-labeled printers, at
  Lexmarks expense
• Printers and supplies decline from 41 of HPs
  current revenue to 22 after merger
• Despite Indigo acquisition, concerns about the
  willingness of merged company to invest
  sufficiently in high-speed color printing

9
Personal Computers

• A weakening market
• Margins shrinking yet strong growth
• HPQ is No. 1 in many segments
• Critical challenge Dell

10
Mobility

• Mobile market better than desktop PCs
• A fickle market
• Execution over technology
• Handhelds 10B market ahead
• Synergistic product lines
• End-to-end solutions

11
The Server Story

• Server market 50B, 6 CAGR
• Opportunities in open standards
• Windows 15B, 9 CAGR
• Intel 21B, 13 CAGR

12
Unix Servers Winners and Losers

• Bottom Line
• HP/UX on Itanium prevails
• TruClusters grafted on top of HP/UX
• Tru64 declines rapidly in ISV enthusiasm and
  revenue
• Even the combination of HP/UX and Tru64 cant
  keep IBM from gaining the No. 2 Unix server
  market position by YE2002

13
Intel Servers Heart of the merger

• Bottom Line
• Proliant prevails over NetServer due to superior
  brand equity and distribution channels
• Struggle over next-generation Itanium platform
  could lead to 6 - 12 month market delay
• Operating system gridlock and closer Microsoft
  alignment result in more passive stance toward
  Linux

14
Proprietary Servers Niche market or accelerated
end-of-life?

• Bottom Line
• OpenVMS Likely decision to focus RD resources
  on migration tools (to Windows or HP/UX) rather
  than on porting OpenVMS to Itanium
• Himalaya Ported to Itanium circa 2004, but
  remains a niche market
• MPE/ix Not ported to Itanium migration tools
  to Windows or HP/UX

15
Storage Too many products

• Bottom Line
• Compaqs StorageWorks brand and products prevail
  in the midrange
• HPs high-end XP storage arrays relatively safe
  (but could be challenged by new high-end Compaq
  technology)
• Potential synergy between competing Storage Area
  Management technologies, but many overlaps

16
Services Can 1 1 3?

• Bottom Line
• Similar business models and revenues
• Platform-centric focus
• Some synergy in expertise
• Compaq excels in mission-critical Windows NT
• HP excels in data center Unix
• But no leap into business consulting (as would
  have happened with the PwC acquisition)

17
Software New, Bigger Strategy Needed

• Bottom Line
• .NET endorsement by 2003, with Netaction
  redirected to a supporting role
• OpenView brand sustained, but increasing
  competition from software powerhouses
• Software continues to be a minor component of
  merged company

18
HP/Compaq Merged Vendor Rating
2006 (0.8p) Strong Positive Negative Positive P
ositive Strong Positive Negative Strong
Positive Strong Negative Positive Strong
Positive Negative Strong Positive Negative Stron
g Positive
2001 HP Strong Positive Negative Positive Posit
ive Negative Negative Positive Strong
Negative Negative Strong Positive Positive Positi
ve Negative Strong Positive
2001 CPQ Strong Positive Negative Strong
Positive Strong Negative Strong
Positive Positive Strong Positive Strong
Negative Negative Strong Positive Strong
Negative Strong Positive Negative Negative
Initiative/Business Technology Personal
Systems PC Business Model Handheld Storage/Network
ing Unix Servers Intel/Windows
Servers Linux Storage Services Business
Strategy Outsourcing Maintenance Software Value-Ad
d Microsoft Relationship Other Sales and
Marketing Printers
19
Recommendations

• Competitors Share available
• Customers Sharpen negotiations
• Investors Companies are cheap
• Suppliers Resist discounts