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HP-Compaq Still Fuels Debate Over Marriage of Equals

By Mike Musgrove
Washington Post Staff Writer
Thursday, February 10, 2005; Page E01

Ever since Hewlett-Packard Co. chief executive Carly Fiorina proposed buying onetime rival Compaq Computer Corp. early in her six years at the company, there has been heated debate over whether the combination was the right course for the venerable computer firm.

The merger was pitched to shareholders as a move that would create a company rivaling International Business Machines Corp. in revenue while employing only half the workforce. But the company is still struggling against fierce competitors such as Dell Inc. and IBM, and Fiorina's departure yesterday lent ammunition to those who contend that tech mergers seldom prove to live up to their promise.

Microsoft found success by buying game makers, companies vastly dissimilar from the software giant, and jumping into game-system competition against hardware makers. Xbox chief Robbie Bach, above, introduces the Xbox in 2001. (Susan Goldman -- Bloomberg News)

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"It's very rare that they work," said Paul Saffo, director of Silicon Valley think tank Institute for the Future.

Companies in the tech sector have varying track records in the area of mergers and acquisitions, though perhaps no deal quite matches the size and complexity of the 2002 HP-Compaq union.

Software mergers, on the whole, seem to work better than hardware company deals. In a software company marriage, companies gain programmers and intellectual property, valuable commodities in the digital age. Microsoft Corp.'s acquisitions, for instance, have helped the software giant create new moneymaking machines out of products such as video games and its PowerPoint presentation software.

But computer makers are different. Competitors share many of the same suppliers and distribution outlets, so the acquisition of a rival does not necessarily open new doors in those areas.

"There's not a lot that's of value in a PC company. It doesn't have a lot of unique assets," said Roger Kay, an analyst at research firm IDC.

Compaq, for example, never got much of a lift from its 1998 purchase of Digital Equipment Corp., nor did Silicon Graphics Inc. gain much by acquiring Cray Research Inc. two years earlier.

Mergers in other industries, such as the telecom sector, have other pluses going for them, said Tim Bajarin, an analyst with Creative Strategies in Campbell, Calif. Should the wireless carriers Nextel Communications Inc. and Sprint Corp. successfully wrap up their marriage later this year, Sprint hopes to gain a loyal base of Nextel customers. In the tech equipment industry, customer loyalty is more fleeting. "People will switch on a coin toss based on price," Bajarin said.

There are other factors. In the tech industry, buying a competitor out and acquiring its manufacturing facilities, for example, can be more liability than benefit. Profit margins in the hardware arena can be in the single digits; any misstep can nudge a company into an unprofitable quarter, and the bigger the company, the bigger the fall.

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