By Ian Fried
Friday, May 02 2003 08:49 AM
URL: http://www.zdnetasia.com/news/business/0,39044229,39129080,00.htm

It's been a year since Hewlett-Packard finalized its acquisition of Compaq Computer, but analysts and others are still asking whether the whole is bigger than the sum of the parts.

On the positive side, HP has successfully welded two former archrivals into a single, functioning organization, according to many. Although some European operations and the internal computer systems from the respective companies have yet to be fully integrated, HP has already realized many of the cost gains the company set out to achieve. The company has also landed high-profile accounts with companies such as the Bank of Ireland.

"Almost a year after we launched the merger of the two companies, we are at a point where we have met or exceeded I think every goal that we set associated with the merger," HP Services Chief Ann Livermore said in a recent interview. On the integration front, HP is winding down its effort with only 200 people working on merger-related issues, from some 2,000.

On the other hand, to echo Gertrude Stein, some wonder if there is enough "there" there to justify the merger. Analysts and critics say HP still has a long way to go to prove the strategic value of the deal, a question that has dogged the company since September 2001 when the merger was announced.

HP's share in key markets also continues to decline from the combined figures for the two companies from the year before. In the first quarter, Dell Computer overtook HP in shipments of PCs and Intel-based servers. Dell's shipments increased 24.4 percent worldwide during the quarter, typical for Dell. By contrast, HP's shipments dropped 5.7 percent and slipped 9.8 percent the quarter before.

In servers, HP rocketed to No. 1 with the Compaq acquisition, but it saw shipments decline slightly in 2002.

HP says it is encouraged by sequential gains in market share in several categories off the low-point established just after the merger. However, with Dell outgrowing HP in many areas, analysts say HP will have a tough time maintaining share against Dell in many key areas.

And Dell shows no signs of letting up.

"We don't believe our competitors are as prepared to be as cost aggressive as they need to," said Dell President Kevin Rollins at the Merrill Lynch Hardware Heaven conference this week. "We're stepping up cost aggression even more this year."

In evaluating how the merger stacks up thus far, a lot still depends on one's perspective.

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Cost cutting is where HP has gotten its highest marks. The company originally set out to achieve US$2.5 billion in annual cost savings by the end of 2004. Now it said it plans to reach US$3 billion by the end of this fiscal year, which is in October.

However, there has been growing concern that HP might be reaching the threshold. Merrill Lynch made that argument recently in downgrading HP, saying that the company was already getting push back from some Taiwanese motherboard suppliers.

Not so, says Jeff Clarke, the former Compaq chief financial officer that now heads HP's supply-chain operations. "There is continued room (for improvement) across our supply base."

For further savings, the company is turning to new techniques, such as forcing suppliers to bid against each other in electronic auctions. For example, HP already buys about 85 percent of its hard drives that way.

In all, HP bought US$2 billion worth of components through e-auctions last year, and Clarke promised the company will "do substantially more this year."