The ill-fated HP-Compaq merger

On September 6, 2001, HP announced its intention to acquire Compaq for $25 billion. It was a stunning end for what still seemed to be one of the rising stars of the PC industry. I also think it proved that bigger isn’t always better. The HP-Compaq merger arguably made sense at the time, but both companies had alternatives that would have suited them better. On May 23, 2012, HP announced the end of the Compaq brand, a stunning end for what had been the largest technology merger in history.

Trouble in paradise for Compaq

Compaq’s struggles began when they made a big acquisition of their own 3 years earlier, acquiring Digital Equipment Corporation. Digital had been in the PC business nearly as long as Compaq, but with a lesser degree of success. Eliminating DEC as a competitor was nice, but hardly a game changer.

The main thing Compaq wanted was Digital’s growing and lucrative services and consulting business. IT expertise was harder to find in 1997 than it is now, so companies like Digital and IBM could make a lot of money setting up systems for companies that didn’t have the expertise, or for coming in to solve problems that the in-house IT staff couldn’t solve themselves. The organization I worked for circa 1998 and 1999 used them a lot. It was the ex-Digital services team at Compaq who found my little Shadow IT project while they were investigating another problem.

The problem with the merger was that Digital owned a bunch of legacy technology that wasn’t core to Compaq’s Business, including a chip manufacturing business, an Internet search engine, and a mini computer business. Compaq had to divest of the properties it didn’t want, like the chip making business and the search engine, and integrate the things it couldn’t divest, like the minicomputer business.

If that had been the only problem, it might have been solvable. But Compaq had two other problems.

Y2K

The first problem for Compaq was Y2K. Making computers prior to January 1, 2000 was a license to print money. Corporations had huge budgets to mitigate the Y2K problem, and that meant there was suddenly money to replace old systems. All you had to do was say those old systems weren’t Y2K compliant. I didn’t operate in that way, but I knew plenty who did, sometimes knowingly, sometimes maybe unknowingly.

Compaq knew this was a temporary boom, but investors assumed that it wasn’t. So that made things even worse at the turn of the millennium when companies closed down their Y2K projects and then immediately slashed their spending.

The dotcom bust

And then the dotcom bust happened. Much like the video game crash of 1983, the dotcom bust was a gradual thing, not a sudden thing. Over the course of 2000 and 2001, young technology companies, particularly Internet companies, who hadn’t found their way to profitability started running out of money. If they weren’t able to find a way to be profitable when venture capital money was readily available, the pressure of having to turn around without having that option available doesn’t make it any easier. Large numbers of these companies started going out of business, and that meant they weren’t buying new computer equipment. It also meant their fleet of computer equipment was suddenly for sale at a steep discount.

There was no reason to buy new Compaq servers when your purchasing agents were getting flooded with phone calls begging them to buy slightly used Compaq servers. Or sometimes new in box Compaq servers, at steep discounts either way.

All of this left Compaq vulnerable. After trading as high as $33 per share, at the time HP announced the acquisition, Compaq’s stock was at $12.35 per share.

In retrospect, Compaq never should have bought Digital. If they were going to make an acquisition, Gateway would have made more sense. But sitting still and waiting for an opportunity would have been their best move.

The HP-Compaq merger was an opportunistic acquisition

I say that because that’s exactly what HP did. HP made a number of comparably small acquisitions during the 1990s, but nothing that was the kind of splash that the Digital acquisition had been. When Compaq’s stock slumped, HP made its move.

And there was more synergy between Compaq and HP than there had been with Compaq and Digital. HP also had a mid-range computing business, so theoretically at least, they had a better idea what to do with that line of business than Compaq ever did. The services business was every bit as useful to HP as it was to Compaq. Compaq’s x86 server line was better than HP had, so that was an immediate upgrade for them. But all of that was a bonus compared to the desktop computing business. This was a chance for one of the vendors in the top five to buy another vendor in the top five and immediately contend for the number one spot.

So HP made the deal, although the board was bitterly divided over whether it was a good idea. The families of the founders, the Hewlett and the Packard in HP, were also opposed. Then HP found out mega mergers weren’t always easy. This one certainly wasn’t, and then-CEO Carly Fiorina probably wasn’t the best person to make the merger work after the fact. Maybe there was and maybe there wasn’t someone out there who could make it work, but she didn’t. She left HP in 2005.

Seven years later, in 2008, HP acquired EDS, which was almost strictly a services business, for $13.9 billion. In retrospect, skipping the Compaq purchase and just acquiring EDS would have made more sense for HP in the long run.

In November 2015, HP split in two, with enterprise equipment going to one company and consumer equipment going to another. It wasn’t quite the same as undoing the Compaq merger, but it’s easy to read the 2015 split as an admission that the HP-Compaq merger was a mistake and the company had become too big and unwieldy.

Dave Farquhar

David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.