When ex-CEO Meg Whitman left HPE, it was on life support and apparently HPE’s leadership felt that tying itself to another company struggling with the future in what has been a reasonably strong market for technology would be a good idea. Back when HPE was Hewlett Packard, it made a series of Hail Mary acquisitions, starting with Compaq and ending with Autonomy. That didn’t work out all that well.
Now HPE is little more than an afterthought in its segment. And Cray has largely been eclipsed by Lenovo in the supercomputer space. (In fact, when I read this, my first thought was, wow, Cray is still in business, how about that?!?) So HPE is acquiring Cray.
This has been positioned as a competitive response to IBM, but IBM’s areas of growth and success long term are its SoftLayer cloud effort (which was also an acquisition), Watson (its market leading AI platform), and quantum computing, where it is the leading vendor building a quantum ecosystem.
While Cray does show up as a potential AI vendor, it doesn’t show up as one of the companies to watch in this space (IBM is at the bottom with, ironically, Accenture, which is one of HPE’s leading SIs). Both HPE and Cray are facing massive competitive pressure from cloud companies, and putting them together only gives HPE a higher top end in the HPC space, which is important, but looks more tactical than strategic, given the growing cloud threat.
Mergers Are a Problem
Mergers are very hard to do. The company that is the best at them is Dell. It uses a modified process from IBM to pull them off successfully. Its process is to focus on the assets, both human and technology, that the company has, and prioritize protecting those assets over everything else.
Most mergers, on the other hand, seem to be treated as if the announcement of the merger was the big benefit and that the subsequent goal is predominantly focused on mashing the acquired company into the acquiring one to minimize operational and cultural differences. The end result tends to be a huge write off as the acquired firm fails to meet projections, largely because the acquiring firm crippled it. The vast majority of the mergers I’ve reviewed and participated in ended badly this way.
More important is that the mergers can become a huge distraction. This is particularly problematic when a firm is facing an uncertain future and needs to focus on the fundamentals, which HPE’s market performance would suggest is a higher priority.
HPE’s Merger Problem
As I noted, mergers are very difficult to pull off and no one likely knows this better than Hewlett Packard did. The company had to write down its Compaq merger by $1.3B, its EDS merger by $8B, and its Autonomy merger by $8.8B (numbers are sourced here).
This means it isn’t good at mergers. In fact, it appears to be really, really, bad at them. In addition, HPE has had some serious trouble executing. This too is ironic, given that Whitman, the CEO who crafted the HPE/HP Inc. split, set HP Inc. up to fail and HPE up to succeed by making sure HP Inc. got the problematic platforms of PCs and Printers along with the majority of Hewlett Packard’s debt. Yet the side of this separation that did very well wasn’t HPE, it was HP Inc., suggesting all of the smart executives went where Whitman wasn’t, and the subsequent financial performance of both firms indicates those executives were right.
Now looking at the performance of HPE over the last year, its valuation has dropped 15.28 percent in what has been a hot tech market, while Cray has fared far better, being up 36.4 percent over the same period. This performance suggests that Cray’s management should not only prevail but take over much of the leadership in HPE. But that isn’t how mergers like this are typically done, where the acquiring firm leads. This suggests that rather than the combination uplifting HPE, it is more likely to cripple Cray’s growth, as the less capable executive team attempts to lead the more capable, in terms of valuation growth, Cray executive team.
Wrapping Up: Disaster in the Making
I can see a light at the end of the tunnel that isn’t a train, but that is only if Cray’s executive staff can remain intact while helping HPE turn itself around. The more likely outcome is for HPE’s executive staff to force Cray’s executives to leave, placing both on an accelerated decline. In the end, even if they do the right thing (which is doubtful), and protect Cray’s executive staff and move them into HPE leadership positions, they still have to deal with both firms’ inability to deal with their biggest threat: the industry’s cloud move that these firms have largely missed.
In short, this merger appears to be another disaster in the making, because HPE’s merger process sucks and because it doesn’t address HPE’s biggest threat, which isn’t HPC. It is cloud computing. So, I expect, we’ll add the Cray acquisition to Compaq, EDS, ArcSight, PALM, Autonomy … The list is legion.