Carli's Going to Win

Institutional Shareholder Services yesterday recommended that Hewlett-Packard shareholders vote in favor of the company's proposed merger with Compaq. As has been widely reported, this is a big win for H-P's embattled chief executive officer, Carli Fiorina. It now appears likely that the proposed merger will win shareholder approval and that HPCompaq will be born.

Opposition to the deal from Hewlett family members strikes me as short-sighted. Yes, the PC, server and mainframe businesses are all low-growth, low-margin businesses. Yes, it is impossible to raise prices on these products. Yes, H-P "owns" the "printer" business and would be well-advised to continue to build upon that point of competitive advantage.

But the future of IBM and HP/Compaq is computer services and bioinformatics. By combining HP and Compaq, Fiorini is creating a company that can at least compete with IBM's computer services and, potentially, beat IBM's Life Sciences computing division. Compaq, after all, was the computing power behind Celera's decoding of the human genome. H-P offers its own first-rate bioinformatics computing capability. Combining the two creates a powerhouse, the leading bioinformatics computing company in the world.

The problem is that bioinformatics computing (as a business) is (a) short-term risky and (b) very expensive. It is unlikely that the genomics sector will deliver much return in the near future, but it seems to me inarguable that it will deliver huge returns in the future. Being one of the two or three bioinformatics computing companies capable of handling, sorting and making sense of vast amounts of genetic data is, medium and long term, strategically sound.

This is what Ms. Fiorini is proposing to do. By combining H-P and Compaq, she hopes to rationalize and maximize the strength of the existing businesses and capitalize on the capabilities of both companies in the medium-term future. It's a smart strategy and one worthy of a "yes" vote in favor of the proposed merger.