HP: Déjà Vu all over again?

There used to be a PC manufacturer that didn't know what to make of the Internet; other than buy Digital, and thus get an aura of respectability, and possibly know-how, in the big server area. That company went by the name of Compaq. When the acquisition magic was gone, and not much else could be produced to the satisfaction of shareholders, another company was trying to make sense out of its engineering prowess in the Internet age. This latter company, as we know it today HP, had ambitious plans of its own. We very well recall eSpeak, Chai VM, utility computing, services, etc. On the services front, it was in 2000 that HP tried to buy PwC Consulting for $18B. And that was last we heard from HP on the services front. As for Compaq and HP, they both underwent changes at their top executive levels. Capellas went on to become the CEO of Compaq, and Fiorina became the CEO of Hewlett Packard.

Now, it is worth having a selectively comparative look at two industries: retailing and computing. In retailing, we've witnessed the success of Wal-Mart and Target, at the expense of other players, and most notably K-Mart. Among the contributing factors, let us not forget of operational excellence driven by technology in one instance, and clever branding and positioning in the other, respectively. In computing, we've seen Dell driving the cost of the PC-based architectures (and most everything else it touches) so low that manufacturing commodity-based computers is nigh impossible in any other way but Dell's. What is Dell's way about? Driving efficiencies through operational excellence, commodity based architectures, and an impressive and growing amount of process-related intellectual property. IBM managed very well to elude these problems by complementing its strong engineering with first class services, open source software, integrated architectures and such. In 2002, IBM found it opportunistically convenient to augument its Global Services and acquired the same PwC Consulting for $2.7 billion in cash, with the remainder of the $3.5 billion purchase price composed of stock and convertible notes. On the other hand, the recent proposed sale of its PC business is indicative of IBM's pain through these transformations.

So, in the Fall of 2001, Fiorina and Capellas thought of combining their two companies. They presented the whole deal as 'there is no other way out,' despite skeptical or dissenting voices at HP or in the analyst-community. At least, not much dissent could be heard as coming from Compaq... Scale was the new corporate orthodoxy at HP, and Deustche Bank vouched for it in a tight proxy-battle that went on well into the next year.

Fast forward to early 2005. The printer and imaging unit at HP is still the most profitable--its market price alone could be about 2/3 of the whole company's. HP finds itself ever more cornered by IBM and Dell, which are squeezing its margins at both ends. Maybe it is indeed time for a change--a real one and not some gimmick to alleviate impatient Wall Street types. Going back to the core competencies HP has always been capable of could be one of the directions. Luckily, HP happens to have a board of directors that believes in change. And, if Lenovo passes the legal hurdles in acquiring the PC business from IBM, how far would an Indian suitor be for the PC-business of HP or, as Yogi Berra has it, déjà vu all over again?