Compaq and HP: Urge to Merge Was Right

by Alice LaPlante

Urge to MergeIn 2001, when Hewlett-Packard’s then-CEO Carly Fiorina announced that the technology giant proposed to merge with Compaq Computer Corp., she set off a firestorm of controversy. Michael Dell, CEO of rival Dell Computer, famously called it “the dumbest deal of the decade,” and Walter Hewlett, the son of one of the company’s founders, mounted an aggressive proxy fight to prevent the corporate marriage from being consummated. Stockholders and the media were fiercely divided as to the wisdom of the move.

Not any longer. Two years after Fiorina’s acrimonious departure—which many attributed largely to the 2002 merger—and the promotion of former NCR head Mark Hurd to lead HP, the consensus has been that the merger was indeed a good idea.

The change in attitude is due as much to Hurd’s leadership as to the fact that the logic driving the merger was sound. “Public opinion about the merger has fluctuated over the years, but people don’t talk about it anymore because its initial assumptions have been proven right, and because Mark Hurd is making it work,” says Robert Burgelman, the Edmund W. Littlefield Professor of Management. With Webb McKinney, a former HP executive vice president who led HP’s post-merger integration team, Burgelman analyzed the merger to distill lessons for other managers, which were published in the spring 2006 issue of California Management Review.

“Although the logic of the merger was correct, executing it was difficult,” Burgelman says. Where Fiorina failed—and where Hurd excels—was in educating HP managers and employees on how to realize the cost and operational efficiencies and translate those into higher margins for each business. “This set the stage of achieving a higher growth rate. By getting HP’s leaders to do a better job of exploiting the possibilities of the merger and thus the capabilities of the combined company, Hurd accomplished what Fiorina couldn’t.”

One of the best things that HP did early on was to engage in rigorous integration planning while waiting for the courts and regulatory authorities to approve the merger. Eventually, more than 1,500 people worked full time on both short- and long-term goals, defining exactly how the new organization and related decision-making processes would work, and developing comprehensive plans for upcoming operational and strategic integration phases. “The integration planning process was so successful that on the day the merger was approved, the new company was ready to go,” Burgelman says. Because of this rigorous pre-clearance integration planning, many issues and problems that typically hinder the effectiveness of large acquisitions were resolved much more easily than most skeptics had expected. The short-term goal of cutting $2.5 billion from operations was exceeded by more than $1 billion, and short-term market-share losses were lower than expected.

“However, it was at this point that Fiorina took a wrong turn,” he says. Because senior management of the combined companies now focused on executing the very complex operational integration, the strategic integration aspect of the merger faltered. For example, HP failed to pick up on key customers’ concerns about the new corporate strategy: Where was the firm heading after the integration was complete? Would HP be capable of continuing its legacy of breakthrough innovation? Or would it simply be a more operationally efficient company? “These were valid questions. And by the end of 2003 things were not going well,” Burgelman says.

For starters, HP was beginning to miss its longer-term goals. Also, its estimates about growth of both the business and consumer PC markets turned out to be overly optimistic. Despite this, top management declared victory. “But it was too soon. And because senior management failed to follow through, it failed to achieve the full promise of the merger,” which led to market disillusionment, and the stock price fell.

In summary, Burgelman says, “establishing the logic for the integration and setting the performance goals were right on target. The pre-clearance integration planning was first-rate. But the strategic integration aspects of the acquisition raised significant challenges that the company did not overcome.”

In hindsight—and the takeaway for other firms—the weak feedback loop between the operational integration process and the firm’s long-term strategic goals prevented management from testing the new strategy with key customers and responding more agilely to longer-term shifts in market direction. “This in turn led to insufficient attention being paid to the multiyear strategic activities required to exploit all the opportunities created by the merger,” he says. Fiorina should have kept the large-scale integration team that had been formed for pre-approval activities. “It could have become much smaller and more focused during strategic integration, but it should have remained in place.”

Ultimately, Mark Hurd did “a much better job at reading the market and adjusting HP’s corporate strategy to reality,” Burgelman says. “What Fiorina was attempting to do was extremely complicated. She was trying to change the culture of HP without really understanding what that culture was like in the first place. Hurd simplified things, and, recognizing that HP was first and foremost a technology company, put it on track to leveraging its considerable strengths.”