HP and Compaq: Why it could end in tears

HP's $25bn takeover of Compaq could crumble in the same fashion as the failed PricewaterhouseCoopers deal if the share value of both companies continues to dive.

The warning comes from Gartner Research who stress that dwindling stock values and poor track records on previous mergers will hurt the deal.

Andy Butler, VP of Gartner Research and author of a report on the takeover, warned on Tuesday that there was a sixty per cent probability the two companies will not complete the deal.

Speaking to silicon.com today Butler said the takeover is a 'lose, lose' situation regardless of the outcome.

Citing HP's difficulties with last years PWC deal and Compaq's 1998 takeover of Digital, he said customers faced six to nine months of complete 'inertia' while the companies worked to finalise the deal, with up to two years of integration difficulties to follow if the takeover gets the thumbs up.

While HP and Compaq seemed confident of challenging any regulatory difficulties that could arise, Butler said cultural differences and investor uncertainty will plague the deal.

"It's going to be pretty hard for these companies to walk away from this because they have staked everything. But they are trying to do what no other company has ever done before and the short-term challenge can only get worse as they move to integrate," he said.

He added that even if the takeover does get finalised, the combined HP and Compaq will require further acquisitions to rival IBM in the services sector.

"This purchase doesn't solve the lack of services both companies had last week. They might be a company but it doesn't make them an EDS or an IBM overnight. They offer nothing like the value proposition of those companies."

Dr Richard Sykes, chairman of outsourcing consultancy Morgan Chambers, agreed with Gartner that the transition will be a lengthy and difficult process, but he remains confident both Compaq and HP are up to the task.

"The new leadership needs to be very determined about the changes. They have to create a services culture, but I think Carly understands the importance of getting through the redesign process very quickly," he said.

At the time of writing HP was down 3.5 per cent at $18.21, Compaq also fell 8.5 per cent to $10.41.