This article from NYTimes.com
has been sent to you by [log in to unmask]


More on Walter Hewlett's opposition to the merger.

[log in to unmask]

/-------------------- advertisement -----------------------\


Share the spirit with a gift from Starbucks.
Our coffee brewers & espresso machines at
special holiday prices.
http://www.starbucks.com/shop/subcategory.asp?category_name=Sale/Clearance&ci=274&cookie_test=1

\----------------------------------------------------------/


For a Hewlett, Merger Raises a Basic Fear

January 28, 2002

By STEVE LOHR




There is something else worrying Walter B. Hewlett.

In his letters to shareholders and filings with the
Securities and Exchange Commission, Mr. Hewlett has
explained his fight against Hewlett-Packard (news/quote)'s
planned purchase of Compaq Computer (news/quote) largely in
terms of two fears. He says he is worried that the merger
would dilute the prominence and value of Hewlett's
lucrative printer business and that big mergers in the
fast-moving computer industry are inherently too risky and
destined to fail.

But in his more detailed conversations with money managers
and industry analysts Mr. Hewlett has expressed another,
perhaps more fundamental fear - that the combined
companies' strategy for sharply increasing sales to large
corporate customers runs a serious risk of stumbling down
the same path as the troubled personal computer industry.

People Mr. Hewlett has talked to say he worries that the
chip maker Intel (news/quote) and particularly the software
giant Microsoft (news/quote) will reap the rewards while
systems makers like Hewlett and Compaq struggle to make a
profit.

If shareholders approve the Hewlett- Compaq merger, despite
opposition from members of the founding family like Mr.
Hewlett, the combined company plans to try positioning
itself as the leader in making larger computers from
industry-standard technology - mainly Intel's
microprocessors and Microsoft's software operating system.
Such industry-standard computers have increasingly been
employed as the data-serving hubs in corporate networks of
PC's, connecting users to office printers and shared data
files and delivering Web pages to desktop machines.

Yet industry-standard servers have not yet made major
inroads into the corporate data centers, which typically
handle a company's electronic transactions, manage its
operations and house its most valuable data. In the data
centers, the computing workhorses are mainframes and big
machines that run Unix, an industrial-strength operating
system.

Carleton S. Fiorina, the chief executive of
Hewlett-Packard, and other board members argue that there
is a huge, profitable business in making industry-standard
computer systems as they improve and move steadily into the
heart of the data center. And big systems sales, they say,
are the entrée into corporate accounts, giving the supplier
an edge in follow-on sales of software and services.

But Mr. Hewlett, who remains on the Hewlett board despite
his renegade status, has told fund managers that the
strategy seems a risky rerun of the PC industry, in which
only Intel and Microsoft can ultimately benefit.

One fund manager quoted Mr. Hewlett as saying: "I don't
think that space is defendable." It seems a strategy, he
recalled Mr. Hewlett saying, that is based on risky
partnership with Microsoft in particular, based on the
assumption that it will win in data-center computing as it
did on the desktop.

Since Mr. Hewlett declared his opposition in November, two
months after the deal was announced, he has issued
statements but has not spoken publicly on the subject. He
declined to comment for this article.

Mr. Hewlett's view contrasts sharply with the consensus of
the rest of the Hewlett-Packard board, based on interviews
with other directors.

"Walter has identified an important issue - the dominance
of Microsoft in the desktop operating system market," said
George A. Keyworth II, a longtime Hewlett board member.
"But we're talking about building a new business, taking
the lead in a whole new generation of computer systems
which will be the platform for the next-generation Web."

The new computer systems are ones using new Intel chips
designed to process data 64 bits at a time, or double the
current standard of 32-bit processing. The new chip
architecture holds the promise of systems that benefit from
the low-cost, high- volume economics associated with the PC
industry yet are able to handle big, data-intensive
computing workloads now more typically performed by Unix
machines or mainframes.

One of the big, new uses is expected to be processing
so-called Web services. Such services mainly involve clever
software, being developed by Microsoft and others, intended
to automate all kinds of everyday individual and corporate
arrangements - from checking personal data and making a
doctor's appointment to monitoring a company's inventory
and automatically reordering stock through the Internet.

Hewlett-Packard has an edge over competitors in making
systems based on the new Intel chips, called Itanium,
because Hewlett engineers worked with Intel on the design.
As a result, Hewlett gets access to the technology first.
And the three major operating systems that Hewlett markets
- Windows, Linux and the its own flavor of Unix - will all
run "natively" on the new chips.

Computer systems using the Itanium chip architecture will
not begin shipping in volume until later this year, and it
is uncertain how quickly corporate customers will accept
the machines. But barring unforeseen setbacks, most
analysts expect the Itanium-class machines - and the
software written to run on them - to represent a major
shift in the industry over the next several years.

"It should be a huge opportunity for us," said Richard A.
Hackborn, a former Hewlett executive vice president, who is
a Hewlett board member and a former board member of
Microsoft.

Compaq is headed in the same direction, technologically.
"Industry- standard servers are eviscerating the low end of
the server market, and moving up to the middle tier,"
Michael Capellas, the chairman of Compaq, told industry
analysts in New York on Friday. "That will continue, and
the Web infrastructure will continue to be driven by
industry-standard servers" running Windows or Linux, a
variant of Unix that is distributed free.

Industry analysts say that opportunity looms for a combined
Hewlett- Compaq, but they also agree that Mr. Hewlett has a
valid concern.

"Windows Itanium is going to be a very powerful force in
enterprise computing, and they can make world-class
systems," observed Martin Reynolds, a research fellow at
Gartner Inc. (news/quote) "But you've got to look at the
economics of servers going the same way that PC's did."

The reigning champion in the PC business, of course, is
Dell Computer (news/quote). Its lead has been built on
streamlined procurement, inventory management and direct
marketing expertise. But that is a very different business
model from the one used by Hewlett-Packard, which supports
an army of engineers and spends heavily on research and
development.

Ms. Fiorina argues that viewing the server market from the
perspective of today's desktop PC market is a mistaken
analogy. The more apt comparison, she says, would be with
the early days of the PC industry, when the machines were
not commodities and there was ample room for innovation in
systems design and innovation.

"We're just at the beginning of Windows in the data
center," she said. "Windows in the data center requires
software tools, support and services to deliver real
enterprise solutions for corporate customers."

If Hewlett-Packard can gain a leadership role in a new
generation of servers, Ms. Fiorina says, that should be a
significant advantage in realizing its strategy of being a
broad supplier of hardware, software and services to major
corporate customers. The tradition in the industry, after
all, is that big computer systems sales open the door to
all sorts of other business - the model that has served
I.B.M. (news/quote) so well over the years.

The strategy behind the merger is for Hewlett-Packard to be
the lower- cost alternative to I.B.M. in big corporate
accounts. Its industry-standard server vision, relying on
Intel, Microsoft and to some degree the Linux community, is
crucial to that game plan.

But a former Hewlett executive, echoing Mr. Hewlett's
concern, says the server strategy, like the merger itself,
is a big risk - though he thinks it could succeed. "The
path to differentiation by betting so much on
industry-standard servers will require the company to be
much more nimble," he said. "You have to keep developing
the surrounding software layers, specialized chip sets and
expertise that add value to the Intel processor and
Microsoft operating system. Otherwise, Dell will eat you
from behind."

http://www.nytimes.com/2002/01/28/technology/ebusiness/28HEWL.html?ex=1013234295&ei=1&en=aba7ce0fe08e80a7



HOW TO ADVERTISE
---------------------------------
For information on advertising in e-mail newsletters
or other creative advertising opportunities with The
New York Times on the Web, please contact Alyson
Racer at [log in to unmask] or visit our online media
kit at http://www.nytimes.com/adinfo

For general information about NYTimes.com, write to
[log in to unmask]

Copyright 2001 The New York Times Company

* To join/leave the list, search archives, change list settings, *
* etc., please visit http://raven.utc.edu/archives/hp3000-l.html *