KUHN CAPITAL Thursday, October 19, 2017
Dispatches from the front

HP + Compaq = ?
(4/15/2002)

We admire Ms. Fiorina's tenaciousness and now apparent success in her grim campaign to merge Hewlett Packard with Compaq.

But will investors share in her glory? Not unless she defeats her next, even more formidable opponent -- the unhappy history of large IT mergers.

What do these IT mega-mergers have in common: AT&T + NCR, Compaq + DEC, Xerox + Scientific Data, Burroughs + Sperry?

They all failed, and for similar reasons. Each case featured big but weak tech players seeking growth and improved margins either by entering a new business via the transaction, or by combining two apparently similar businesses in a bid for economies of scale.

Each featured strong, top-down bureaucracies, and distinctly different rank-and file cultures. And in each case. that rank-and-file had grave misgivings about the wisdom of the combination.

These factors seems to accurately predict failure (defined as substantial financial losses and usually the discontinuance of the purchased or even combined business). And the single factor that emerges as most determinative is cultural incompatibility.

On the other hand, M&A does work, but in different circumstances. Cisco has executed a string of successful deals characterized as big buying small, cautious and careful analysis, immediately available operating synergies and -- most important -- a thorough audit of the target's culture to confirm that it fits the acquirer's "worldview".

Why is culture so important? Much more so than is the case in non-technical industries, tech workers are fiercely dedicated to their products and services, talented, energetic and bonded tightly into competitive teams. Their culture accommodates and feeds this hyper-demanding work environment. They're going to change the world, and sometimes they do.

Now borg this culture into a bland but authoritative bureaucracy populated by "lifers" who don't fully understand the business they're been assigned to integrate, and the result is revolt. The new workers, anxious over the perceived abandonment of their leaders, sullenly absorb a series of what appear to be nonsensical directives issued in a foreign tongue. After some months of this, the best leave for greener pastures, while those with fewer options hunker down, stop innovating and instead warily watch the directions these new political winds blow.

In the case of HP + Compaq, the battle for successful integration will occur in the minds of thousands of employees who now have these several choices -- vote with their feet, become corporate zombies, or join new teams to joyfully exploit the opportunities brought by synergism. Which choice they make will be driven by the cultures from which they derive. In the case of HP, some people simplistically characterize it as a paternal, coddled California lifestyle. In the case of Compaq, commentators call it a posse of competitive Texas cowboys.

Obviously, in the past these contrasting styles served their companies well. But that was then, and now we must somehow make one look like the other, or invent an entirely new approach.

Your call.

Ryan Kuhn


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