Table: The New HP: The Pros and Cons of the Merger

Does combining HP and Compaq make sense? Here's a look at the positive and negative aspects of the deal.

The Positives:


HP and Compaq expect the merger to save them $2.5 billion in operating costs by 2004, largely because of layoffs that insiders say range between 15,000 and 30,000.


HP-Compaq would have revenues of $87 billion, putting them neck and neck with IBM for the title of the largest tech company. They would have plentiful cash flow from businesses such as computer repair services, which is expected to generate $1 billion in profits a year.


The companies will be able to sell their hot products to the other's existing customers. For example, HP could sell its printers to Compaq's longtime customers and HP could hawk Compaq's storage gear to HP customers.


The companies' technologies complement each other in key areas. HP would be able to build better "always on" Internet systems with Compaq's super-reliable Himalaya servers and its clustering software, which enables many servers to operate as a single entity.

The Negatives:


Tech megamergers typically run into big problems. And the HP-Compaq deal is by far the biggest high-tech merger, involving 150,000 people in 160 countries. Bringing it off without losing momentum is a long shot.


The deal would make HP the king of the PC business, with 18% of the market. Problem is, the business is troubled, with negligible operating margins and no revenue growth. If not run well, losses could mount--and siphon investment dollars from other, more profitable parts of the company.


The new HP would be tops in PCs, back-office computing gear, and printers--but for how long? While HP will keep dominating printers, it will be surrounded by rivals better positioned in other areas, including Dell in PCs and IBM in services.


Compaq has struggled for years with layoffs and poor performance. HP was struggling to adapt to Fiorina's management changes even before the downturn. Now, the prospect of massive layoffs could send the mood at both companies further south.

    Before it's here, it's on the Bloomberg Terminal.