Murky Merger Puts Some Customers In Holding PatternMurky Merger Puts Some Customers In Holding Pattern

David Lauderdale has watched demands on his company's Web infrastructure expand tenfold in the past year as Worldspan L.P., a provider of electronic travel services, continues to grab a bigger chunk of the online reservations market. To ensure that Worldspan--jointly operated by several major airlines--can handle the growth, Lauderdale, the company's VP of worldwide technical operations, inked a three-year deal in October with Compaq under which the computer maker will provide ProLiant Windows servers and rapid deployment services.

Lauderdale says he figured that Compaq, along with would-be partner Hewlett-Packard, would be able to deliver innovative, best-of-breed tools. Now, he doesn't know what to think. The merger's on shaky ground, and if it fails, some observers say HP's management team will fall and Compaq could end up as a smaller force in the IT landscape.

The trouble began earlier this month when several HP heirs began voicing opposition. The merger will drag HP deeper into the profit-challenged PC business and eviscerate the company's culture of homespun inventiveness, they say. Walter Hewlett, HP's sole dissenting board member, wrote to the boards of HP and Compaq last week, urging them to unwind the plan.

HP and Compaq executives still publicly support the merger. But it appears Compaq is making contingency plans to go it alone if the needed approval from regulators and shareholders doesn't come through.

Within hours of a Dec. 7 statement from the David and Lucile Packard Foundation, saying it would oppose the deal in a shareholder vote slated for early next year, Compaq CEO Michael Capellas sent an E-mail to employees, saying that an end to the deal wouldn't halt Compaq's campaign to lessen its dependence on PCs and bolster its share of the enterprise systems market. "Regardless of the circumstances--whether we are part of the new HP or a standalone company--I am confident in our ability to achieve these objectives," he wrote.

Compaq officials say there's no about-face and that the company is merely fulfilling its legal obligation to compete as an independent entity until the merger is consummated.

But when the deal was revealed in September, Capellas told employees that Compaq needed to pair up with HP to make headway in the enterprise market. "Two significant gaps ... make it difficult for us to be truly recognized as a major player in the enterprise," Capellas wrote at the time. Those gaps, he said, included Compaq's weak position in the Unix market and the fact that it doesn't have a set of open application-integration tools (like HP OpenView) to support interoperability.

Compaq's hedging isn't surprising now that some customers are threatening to put away their checkbooks amid the confusion. Worldspan's Lauderdale says he's hesitant to spend any more money with Compaq until the merger is resolved. "The fact that the deal may not come together leaves us in an uncertain mode," he says. "I'm not inclined to make any purchasing decisions until I see where the future lies." Lauderdale says he may look elsewhere the next time he shops for new hardware.

The uncertainty may be making it more difficult for Compaq and HP to break into new accounts. Dell Computer customer Glenn Bonner, CIO at MGM Mirage Inc. in Las Vegas, says both Compaq and HP would have a tough sell if they came calling. "I wouldn't make a decision today to switch to Compaq or HP. Dell is not being bought," he says.

Compaq officials point out that they have secured a number of high-profile contracts since the merger was disclosed, including sales to American Express, General Motors, and the U.S. Postal Service. HP recently beat sales forecasts for its fourth quarter, company officials say.

Still, those opposed to the merger own about 18% of HP's stock. About a third of the 82% of shareholders who have yet to express an opinion are retail shareholders who typically don't vote. That means HP executives, led by CEO Carly Fiorina, must convince 80% of the remaining institutional shareholders that the deal is good for the company and its stock price. Those are tough odds, says Ashok Kumar, a U.S. Bancorp Piper Jaffray analyst. Analysts at numerous other firms also say the deal is in trouble.

HP is staying the course. During a conference call last week, Webb McKinney, who's heading integration efforts for HP, said "there is no plan B." HP has created an office of the president for its Business Customer Organization, which is managed by McKinney, tasked with ensuring that customers don't experience any disruptions because of the merger. "Their job is to overcommunicate," McKinney says.

Most analysts say HP is better positioned to withstand a protracted struggle over the merger. The company's highly profitable printing and imaging operations brought in almost half of its revenue in 2001. By contrast, almost half of Compaq's sales come from its money-losing PC unit. Observers say an independent Compaq would likely retrench as a smaller company focused on high-margin enterprise products and services. Says Kumar, "That's the only thing that would make sense for them at this point."