It will be bloody, but Hewlett-Packard and Compaq were left few options other than a merger and radical surgery
Edmond Warner
As they strode into work last Tuesday morning, Wall Street’s finest must have believed that at long last they were witnessing the turn in the investment banking cycle. The New York Times was carrying the news of Hewlett-Packard’s (HP) $87-billion merger with Compaq. The largest technology deal ever. All, surely, was now well with the world.
By the end of that day’s share trading investors had subjected the merger proposal, confirmed at the opening bell, to a dose of sceptical analysis. HP shares had fallen by 19%. They continued their slide through the remainder of the week. Big, in the eyes of bankers, may be beautiful, but to investors it’s bloody difficult to pull off.
Carly Fiorina, HP’s chairperson and CEO, claims there was no “eureka moment” with Michael Capellas, her opposite number at Compaq. Instead, their plans to consolidate the computer market are being touted as having deep analytical foundations, the fruit of painstaking work by chain gangs of consultants. The message to the market, and to the workforces contemplating redundancy, is that this is a merger of necessity, born of the economic downturn.
The time for triumphalism from Fiorina will be when she can demonstrate that the consultants’ cost-saving plans have been met, without an unexpectedly large loss of revenues. No doubt the accountants will do their darndest to dress up reality, but the truth will probably not be known for a couple of years maybe more.
Little can HP or Compaq have realised, only a few months ago, that they would have been embarking on this long-haul journey to competitiveness. Sure, both were having the spots knocked off their PC divisions by Dell, but buoyant share prices allowed them to contemplate more imaginative, expansionist strategies. These ambitions drove HP’s failed bid for PricewaterhouseCooper’s consulting business last year.
Although the market doubts management’s ability to deliver on its merger plan, now the genie is out of the bottle few are arguing for him to be forced back whence he came. The need for HP and Compaq to merge is taken as read. This at least tells us that the bloody state of the tech industries is fully recognised, and the need to search for structural solutions is widely accepted.
Wall Street’s underemployed investment bankers would have loved a positive share price response to the HP-Compaq plans. It would have formed the lead in their pitches to clients. “Look guys, shareholders can’t get enough of these cost savings. If you want to keep these monkeys off your back, just find them a big slug of synergies. But make sure you’ve strapped a golden parachute to yourself first.”
As it is, the pitches will have to be just a little more subtle. “Look guys, just think about where the HP price would be now if it wasn’t for the Compaq deal. Sure, the monkeys don’t believe Carly can deliver the goods, but just think what a heroine she’ll be when she does. And if she doesn’t? Well I’m sure she’s got herself a nice bit of gold silk on her back.”
This argument may not sound compelling, but the economy is so weak and the tech industry so traumatised that it may yet hit the spot. The growing number of companies being rushed to casualty will aid the bankers’ cause. Some will fail, but most will provide synergy fodder.
The United States investment banking industry certainly needs to win a few pitches. Dealogic Capital Data calculates the value of announced mergers and acquisitions in America to have been $441-billion in the first half of this year. This compares with $1633-billion in the whole of last year. One can see, then, that an $87-billion deal is not to be sniffed at.
Industrialists and their advisers take time to adjust their interpretation of the real and financial worlds, and in turn the value they are prepared to place on companies.
In the current climate it is no surprise that deal flow has dried up. No one wants to overpay for a business, and technology businesses have been getting cheaper by the minute.
Shareholders have little option but to hunker down alongside the bankers and executives. Most of the deals in the consolidation wave, just like HP’s offer for Compaq, will be paper rather than cash offers. This is partly because cash is not plentiful (and what does exist must be preserved as a buffer against uncertainty) and partly because the logic of the mergers makes share swaps appropriate. All parties share in the risk, the pain and the opportunity.
Unfortunately, history suggests that very few executives have the skills (and luck) to pull off successful cost-cutting mergers in the teeth of a downturn.
Too often, timetables slip, tough decisions are ducked, and important issues fall through the planning cracks. That won’t stop the investment bankers telling their clients that they are, of course, the exceptions to this rule.
Edmond Warner is chief executive of Old Mutual Financial Services in the United Kingdom