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PALO ALTO, CALIFORNIA -- Executives at Hewlett-Packard and Compaq Computer had figured out 95 percent of their joint product strategy by mid-December last year, almost five months before the plans were made public.

"The product part was one of the easiest things--we took the products with the leading market momentum and share," said Ann Livermore, head of HP's services group, who discussed the merger at an industry dinner here Monday night. "They were some of our most important decisions, but they were also the least debated."

The fast work in this area is only one example of how quickly the merger team worked to make the deal happen, trying to lay the groundwork for a successful acquisition that would buck an industry trend for giant corporate mergers--for the most part, they don't work out.

Ready to Go

Before the deal was even announced, the companies had decided which managers would lead the combined company in its various global markets, said Peter Blackmore, head of HP's enterprise systems group, who joined Livermore in the discussion. Each company had had its own country manager, he said, meaning one of them in each country had to go.

When the deal received official shareholder approval on May 1, signs bearing the Compaq name at its factories and offices were hauled away immediately, to be replaced with those of HP. The companies' e-mail systems were merged from day one, Blackmore said, and when Compaq staff got their first paychecks later that month, they arrived with an HP logo.

"This was very much designed to show our customers and our employees that we were ready," Blackmore said.

Emotional Reactions

Despite the efforts, news of the deal came as a shock to most workers when it was announced a year ago. Dealing with employees' emotional reaction was the biggest hurdle to overcome, Livermore said, admitting that even she was blindsided.

"My initial reaction when Carly told me was, 'You've got to be kidding,'" she said, referring to HP Chairman and Chief Executive Carly Fiorina. "It was the last thing on my mind."

Looking ahead, HP hopes to grow its business selling products for consolidating servers and storage equipment, deploying mobile infrastructures and building CRM systems, Blackmore said. "CRM systems do help customers, they absolutely help them get a return on investment," he said.

Expanding HP's services division is also a big priority, and the company sees outsourcing as another potential moneyspinner, Livermore said. The merger propelled HP from around number eight in the services market to number three, she said, behind IBM and Electronic Data Systems, and has made HP "big enough to matter." The division now boasts 65,000 service staff worldwide, she said.

Business Plans

Indeed, growing its business overall is a major goal for the new company. Pounded by the tough economy, HP saw its revenue fall 9 percent in its most recent quarter, to $16.5 billion. Sales from its enterprise systems group fell 22 percent from the year earlier, while its personal systems group reported a decline of 19 percent. Only its printing and imaging business saw growth, growing revenue 10 percent.

But the executives insisted Monday that the merger was the right move. In April last year, Blackmore said, over dinner at the home of Michael Capellas, Compaq's top brass stewed over changes that were sweeping across the IT industry. Standard server sales were growing, profit margins were being squeezed, and only one answer seemed to make sense: consolidation.

Like Livermore, Blackmore wouldn't learn of the merger plans until later, some two months before it was announced. But in hindsight, he said, the conversation that night seemed to set the tone for the rationale behind the acquisition to come: Margins were being squeezed, economies of scale were imperative, and only the very biggest companies would survive the years ahead.

Indeed, he said, of the five remaining hardware giants in the U.S.--HP, EMC, Dell Computer, Sun Microsystems, and IBM--only three will survive in the long term. Falling margins make further consolidation inevitable, he predicted.

Looking Forward

Asked how far along the merger is now, Livermore said about one-third of the integration work has been done.

"By May we'll be at closer to 90 percent," she said.

The executives were sanguine about the future. They talked of long hours and of endless travel, but seemed to relish the experience and exhilaration that comes from being a part of a merger so big.

"Not everything was perfect, but dammit the launch was very good," Blackmore said.

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