In the aftermath of the .com bubble HP found itself looking for a viable alternative to its Unix architectures in the corporate server market. The Unix server market had enjoyed an extraordinary growth during the .com boom. Every company, including your cousin's, was planning to be the next Yahoo or Amazon, hence the (anticipated) demand for scalable and reliable infrastructures was nowhere in sight. Cisco, WorldCom, EMC, Sun, HP are just few of the names that stood to gain big from the never-ending Internet revolution. Yet, when reality was set for a comeback, these same infrastructure providers were among the hardest hit.
Indeed, Cisco wrote off about $2.25B worth of inventory in 2001, WorldCom and several in its category ceased to exist, Sun is still looking for a way out, while HP saw the light of a new day with a blind eye. In fact, Sun and HP had some things in common: great deal of reliance on Unix-based hardware revenue at the expense of software and services revenue. HP though had the advantage of a revenue stream diversified enough between corporate and end-user customers. EMC, another hardware star of the late 90's, has since set itself on the (right) track of complementing its hardware (revenue) with a string of inspired software acquisitions (e.g. Documentum, VMware.)
In the 2001 corporate server market, Intel based architectures were becoming more capable in reality and not only in the perception of the customers looking to shave costs. One could cluster enough Intel (multi-)processor based machines to serve webpages and applications, route email traffic, or even build a decent storage solution. While Sun had all inertial reasons to reject anything less than Solaris on Sparc, HP had already been a player (however minor) in the Intel based server architectures. Hence the logic of HP in acquiring Compaq: to become a credible player in the Intel based server market. The logic went on and stated that Compaq's weakness in the Intel server market, relative to Dell, was going to be addressed by demand consolidation (thus lower prices forced on suppliers), scale economies, and operational efficiency in the combined entity--estimated at, and later achieved, $2.5B.
HP failed on a couple of fronts. The most obvious is its competition with Dell. By choosing the better set of systems and processes from the two companies (HP vs. Compaq) and making it into the merged entity's standard, HP failed to acknowledge the intrinsic advantages in Dell's systems and processes. So instead of outdoing Dell, HP decided to add scale to an underperfoming set of systems and processes. In fact, the extent by which HP could outdo Dell's processes would have been a better metric associated with the acquisition. So, HP's server strategy failed due to a miscalculated objective and/or sloppy execution.
The second and more insidious development HP failed to fully consider was Linux's and the growth of the Lintel market. Around 2001, when Amazon and Google announced their adopting it, Linux was still relegated to the fringes of the corporate data center. So much has changed since that even Oracle and SAP run on Linux today. To its defense, HP could not have anticipated IBM's Linux moves, directed not only at Microsoft but at itself and Sun as well. It is through the IBM gifts that Linux has its place in today's datacenter. These gifts have been both direct, intellectual property, and indirect, corporate credibility. IBM has more than made up for the value of its gifts to Linux and forsaken revenue in its own Unix servers by selling services and/or a myriad of software applications on top of Linux. Arguably, IBM benefits now from an virtuous cycle it was instrumental in creating: Linux + services + Linux-applications + weakened competitors. If HP's Linux-delay could be half understood, Sun has no excuse for letting IBM steal the show. In conclusions, it is neither HP nor Sun that has capitalized on one of the most important trends in the server market: Linux.
One may add HP's loyalties to the company's problems. It could be viewed that staying for too long too close to Microsoft, Intel, and its own Unix, made HP less than prepared to capitalize on developments such as AMD's Opteron, and Linux.
On both accounts, HP failed for it did not know the future. In conclusion, one who doesn't know the future either stares at it and is condemned to reaction or creates it.