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SEPTEMBER 17, 2001

© Copyright 2001 Hewlett-Packard Development Company, L.P
All rights reserved. Do not use without written permission from HP.

Let me start by acknowledging that I deeply regret that the horrific events of last week have made travel difficult for all of us, particularly those of us who reside in the U.S.

I trust by your presence at this conference that none of you were personally touched by the tragedy we all witnessed last week -- aside from sharing in the profound grief and anger that senseless acts like this stir deep inside us.

I'd like to focus my remarks this morning on events that preceded last week. I'd like to focus on the strategies that drove our decision to merge with Compaq.

Since we announced the merger two weeks ago, volumes have been written about the combination -- much of it focused on PC market consolidation or creating scale to cut costs. But those stories, frankly, miss the point.

Steps like the one Michael Capellas and I took two weeks ago are based on a shared commitment to our customers, employees and shareowners. A commitment to lead and drive the industry through its next inflection point. The accelerating shift toward market-unifying architectures and approaches. A shift that serves customers better, a shift that will unleash the inventive energies of this industry on a new generation of products, applications and solutions.

Why are market-unifying standards so important? Why are Itanium, UNIX/Linux, NT, open source, open APIs and open connectivity standards important in the context of our merger with Compaq and the future of the technology industry?

Because market-unifying standards at the processor level, at the operating system level, at the application interface level, at the device and applications connectivity level will shift the underlying economics and the basis of competition in this industry. Market-unifying standards lead to more choice and flexibility for businesses. They lead to ease of use for consumers. They lead to advantaged cost models for technology suppliers, which can be passed on to customers in the way of lower costs. They lower the barriers to entry and create competition. Market-unifying standards and architectures ultimately put customers in control, which is where control should ultimately reside.

Truly ubiquitous standards force the industry to work harder -- to earn customers' business everyday -- instead of selling to customers once and collecting proprietary margins for years to come.

Think about every industry that has reached this stage in its maturation -- the auto industry and the consumer electronics industry are two examples. Industries where the adoption of standards became the disruptive and accelerating force that changed the underlying economic models in those industries, redefined the basis of competition, drove the next wave of innovation, and finally brought those industries into the mainstream.

By combining HP and Compaq, we are committing to market-unifying, industry standards-based architectures and approaches across every level of the technology stack and across every category we compete in.

  • In the infrastructure arena -- across our storage, management software and server offerings so that businesses can adapt quickly to changing business dynamics;
  • In access devices -- PCs, PDAs, personal storage devices, digital cameras, digital music and entertainment devices so our customers and the devices they use can connect to each other and to useful applications and services effortlessly; and
  • In printing and imaging -- so that printers become full-fledged citizens of the net, devices where information and images and ultimately rich media content can be accessed, printed, stored and shared from any other network device. Again, effortlessly and at much lower costs to customers.
Fundamentally, this merger is about three things:
  1. It's about becoming a better, strong supplier to our customers. The supplier that puts customers first. The supplier with unmatched depth and breadth in products and solutions and services. The supplier that recognizes that the real world of business prioritizes speed and choice and flexibility and return on investment over proprietary, inflexible, old-world approaches to technology that shackle businesses to their past and to their IT vendors.
  2. It's about becoming a better, stronger ally for our partners. By combining forces and leveraging our partners more aggressively, we can accelerate the development and adoption of open, market-unifying architectures including Itanium and Linux, creating new markets, new momentum, and new opportunities for our partners to innovate.
  3. It's about having a clear, pragmatic view of the economics of the industry. Economics that suggest that going forward R&D and sales and marketing leverage and scale will determine market leadership.
The new HP will have more "capital effective" R&D efforts as a result of greater product and services breadth and a better overall cost model created by increased volume and velocity. In fact, no company will have better-leveraged and more effective capital utilization in the industry than HP-Compaq, which means we will be able to redirect dollars into inventing and innovating across our products and solutions. And it means we can increase our feet on the street, our sales and marketing coverage in geographies, in customer accounts, and in retail and commercial channels around the world.

As a result of this combination, vendors whose business models rely on vertically integrated, proprietary technology architectures -- from the processor up through the software stack -- will be challenged. These vendors will have to fundamentally rethink their business models in the next two years as standards-based approaches gain momentum. Vertical integration didn't work for Henry Ford and it won't work for IBM or Sun.

And vendors whose current economic models are solely based on volume and velocity will not be able to gain the R&D and sales and marketing leverage to innovate and differentiate long term. As value in this industry continues to migrate up toward solutions and services and down toward embedded systems and technologies, vendors like Dell will be increasingly challenged.

No doubt, the PC category in and of itself has reached a stage in its maturation where economies of scale and brand are the key differentiators. A stage where consolidation is inevitable. In considering this merger, we analyzed every alternative and in the context of our broader business strategies, we concluded:

  • The PC business is important to us today and it will continue to be important going forward. There are certain product categories in the consumer technology market that are essential to being a player in the hearts and minds and homes of consumers -- branded PCs and notebooks are among them. Branded digital cameras are another. Cameras are an essential product offering if you want to be a player in the digital imaging business.
  • And it's important to remember that as a global company with a presence in more than 160 countries around the world, we operate in markets and regions of the world that are far from saturated when it comes to PCs -- countries in Europe, China, Latin America and in developing countries and economies around the world. Despite the saturation and contraction in the U.S. PC market, we must take a long-term, global view of our business.
While one benefit of our merger with Compaq is an assured presence in the PC category going forward, this deal was not predicated on doubling down on PCs. Truthfully, PCs have not accounted for much of the valuation in either company's stock for some time. As a result, it would have been irresponsible for Michael and I to undertake this merger on the basis that PC scale was the primary value driver for our shareowners and customers.

In fact, one of the key benefits of the merger is that the new HP's higher margin imaging and printing, IT services and infrastructure businesses will be positioned to make a much greater contribution to the top and bottom line. The real synergies in this combination come from enterprise computing, not PCs. Even so, this merger gives us the opportunity to make PCs a part of our valuation going forward because we'll be competing in this space with scale, resources and the ability to innovate -- a combination that only the new HP will be able to offer.

There is no question that consolidation in a maturing industry is inevitable and natural, and both Michael and I share a commitment to leading change rather than following it. Independently our companies have a common view of where technology is headed -- Itanium, UNIX, Linux and NT, next-generation devices, utility-based computing models, service-centric computing. By combining forces and leveraging partnerships we can accelerate and lead this shift.

And a global economic downturn and a tech recession is precisely the time to do a merger like this one. It gives us time to complete the heavy lifting required in the months ahead so that we can indeed emerge a stronger, more focused competitor when the economy does turn around.

Rest assured that we are appropriately sober and pragmatic about what's required to integrate these two companies. Both management teams took this into account when we evaluated the logic of the merger and we both concluded the strategic rationale and benefits to customers, to shareowners and to employees outweigh the risks. We had a business plan and an integration plan done before we ever called a banker.

We have a very capable management team between our two companies. And the teams working on the integration share a common vision of what this merger represents in terms of industry leadership. They share a common vision of what's possible. The team is committed to making the right calls around management choices, product roadmaps, technology strategies, R&D, supply chain models, and shared infrastructure. And they're committed to making those calls quickly and decisively.

The Compaq management team carries near-term memories of what worked and what didn't in the DEC acquisition. And the HP management team understands the operational rigor required to do the largest spin-off in corporate history -- and do it well -- the spin-off of Agilent.

Trust me, this team is determined and motivated to prove the skeptics around this combination wrong.

When you hear from Michael Capellas later in the day, he will frame up the industry and technology trends that we see ahead and how our combined intellectual property, world-class engineering resources and deep solutions capabilities position us to define and capitalize on the emerging technology landscape.

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