Big Iron in the fire

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Hewlett-packard co. stakes its brand on a rich legacy of invention. The company born in the world's best-known garage puts that legacy to the test as it attempts to create a tech powerhouse via its acquisition of Compaq.

That assumes the deal closes-no slam-dunk, given mounting investor skepticism and antitrust hurdles.

If it fails, HP's reputation would be tarnished. But Compaq Computer Corp. would have the bigger problem: Beleaguered Compaq last week effectively became an orphan brand when HP signaled the merged enterprise would be built on the HP brand.

It adds up to a lot of uncertainty-precisely what business buyers and consumers don't want from tech suppliers. That's a problem for Compaq and HP, and a marketing opportunity for rivals such as Dell Computer Corp., IBM Corp. and Sun Microsystems.

The proposed merger, announced Sept. 3, would create an $87 billion colossus rivaling IBM in size. But skeptical investors drove both stocks down to mid-'90s levels, cutting the deal's value from $25 billion to $19 billion.

Given the hurdles, it's conceivable the pact could go the way of General Electric Co./Honeywell International: When GE in July aborted the much-hyped acquisition after European antitrust regulators refused to approve the deal, Honeywell was left at the altar, its prospects limited.

Even as Compaq's stock sunk last week amid the uncertainty, Compaq ran an ad in The Wall Street Journal showing frantic stock traders. The text asked: "What does Compaq give the world's largest stock markets?" The ad's headline: "Stability."

Challenges for Compaq and HP go beyond investors and regulators. The companies would meld business divisions and sales forces, cut costs along with about 25,000 workers, pare product lines and brands and eventually consolidate marketing. HP would remain the master brand, while a few Compaq brands likely would live on as sub-brands, though one consultant who has worked on the Compaq business doesn't think much of the Compaq brand would survive.

HP Chairman-CEO Carly Fiorina said she expects the combined companies to have the same marketing budget as they did individually-a bold claim given HP's resolve to cut the two companies' expenses by $2.5 billion.

"We have to position the combination effectively," she said. "We will be spending at least as much [on marketing] as the two companies spent individually."

HP would be the "surviving brand" and the merged company would use the "sub-brands of Compaq smartly," Ms. Fiorina said.

Most industry insiders and agency executives say agency consolidation is all but certain if the merger is completed by its mid-2002 target. HP spent $160 million in the U.S. on measured media in 2000 and $55.5 million from January to May 2001, according to Taylor Nelson Sofres' CMR; Compaq spent $149 million in 2000 and $50 million for the first five months of this year. Meanwhile, HP reported spending $1.1 billion on global advertising in the year ended Oct. 31; Compaq said it spent $370 million on global advertising in 2000.

Omnicom Group's Goodby, Silverstein & Partners, San Francisco, handles HP's global brand and consumer advertising and media planning. Publicis Groupe's Publicis & Hal Riney, San Francisco, handles business product and services ads; sibling Optimedia, London and San Francisco, does media buying.

Interpublic Group of Cos.' Foote, Cone & Belding Worldwide, New York, won Compaq's global account more than a year ago. One agency executive steeped in the tech business predicted a free-for-all between Publicis and Omnicom for the consolidated account. Goodby enjoys a close relationship with HP and Ms. Fiorina. FCB and Interpublic also are expected to mount a challenge.

Brand and review consultants are already circling the business. WPP Group's Landor Associates, San Francisco, a longtime HP partner, likely would play a role in branding the merged company. Landor, New York, also has worked with Compaq for four years. Landor executives did not return calls.

An HP spokeswoman declined to comment on marketing and agency issues, including the potential of an interim cross-company marketing team, citing premature timing. A Compaq spokesman also declined to comment on marketing plans. Riney and Goodby executives said they knew of no ads planned to tout the proposed union.

Insiders are skeptical about the marriage of the two ailing tech powers, intended to compete against No. 1 IBM and feisty Dell. Rob Enderle, research fellow at Giga Information Group, noted HP and Compaq face big challenges in managing their businesses during the transition. "HP's e-services business is a mess," Mr. Enderle said.

Dell, which started a consumer PC price war this year, is poised to steal share in the enterprise market, picking off plum accounts while Compaq and HP are preoccupied.

"This is all about cost-cutting," said a West Coast consultant. "It's time to circle the wagons if you're selling hardware these days. Michael Dell is killing everybody."

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