A confident Michael Capellas, chairman and chief executive officer of Compaq Computer Corp., said Thursday that his company's merger with Hewlett-Packard Co. could receive an unexpected financial boost as the combined company thins the ranks of its component suppliers and uses size to increase its competitiveness.
With higher volumes on its side, the merged HP and Compaq will trim the number of suppliers it uses for components such as memory chips and monitors, creating a significant reduction in costs, said Capellas, speaking at a hardware conference here sponsored by Merrill Lynch & Co. Inc. With the contentious deal apparently having passed its major hurdles and expected to be finalized next week, Capellas turned to what he believed to be the acquisition's high points.
"There have been areas of savings that are larger than I thought, and they came in surprising places," Capellas said.
As a larger maker of PCs and servers, the combined company will be able to command lower prices from component suppliers to the point where the company is seeing "substantial differences" in its materials costs. As the company makes bigger purchases from fewer suppliers, these cost improvements will increase, he said.
"I think it's very clear that you have long-term success with fewer strategic partners," Capellas said.
Also on Thursday, Compaq announced another plan to lower its costs, saying it has signed a long-term agreement with FreeMarkets Inc. for software to streamline its supply chain. Compaq will use FreeMarkets' FullSource software to orchestrate online bidding with component makers, the company said in a statement.
Industry pundits have questioned whether the deal would help HP compete more successfully against Dell's trim hardware distribution model or IBM's lucrative services business. Capellas was pushed to answer how HP will distinguish itself from rivals and ensure it does not get trapped between Dell and IBM.
Capellas claimed HP has picked a simpler strategy than IBM's by focusing in on Microsoft Corp. Windows, Linux and Intel Corp. chips as opposed to Big Blue's vast hardware portfolio with a number of operating systems and chip architectures. Against Dell, HP will use some of the expected cost reductions in combination with its hefty research and development efforts to edge out its rival's hardware, he said.
Capellas also gave some hints about the combined company's product roadmap, saying that HP's OpenView management software will run across all of the company's hardware and that a new handheld device with telephone capabilities was on the way.