http://www.nytimes.com/2001/09/04/technology/04DEAL.html?todaysheadlines
NEW YORK TIMES
September 4, 2001
Hewlett-Packard to Acquire Compaq in $25 Billion Deal
By ANDREW ROSS SORKIN and FLOYD NORRIS
Hewlett-Packard (news/quote) said yesterday that it was acquiring Compaq
Computer (news/quote) for $25 billion in stock in a bold move to grow as the
computer industry struggles with shrinking sales.
The merger, if completed, would produce a company with total revenue only
slightly less than that of I.B.M.(news/quote), the largest computer company.
But both Hewlett-Packard and Compaq have recently seen revenue slide and
profit plunge because of a industry slowdown, and both have announced job
cuts.
The merger of the two computer giants could create a stronger competitor for
Sun Microsystems (news/quote) and I.B.M. in the server computer market while
putting pressure on I.B.M., Dell and Gateway in the personal computer
business. Hewlett-Packard and Compaq said the merged company would be in a
position to compete with I.B.M.
across virtually its entire product line.
For Carleton S. Fiorina, who became chief executive of Hewlett- Packard in
1999 when she was hired away from Lucent Technologies (news/quote), the
acquisition amounts to a renewed bet on the computer business and
particularly a new operating system for computer servers that was developed
by Intel (news/quote) and Hewlett-Packard. Compaq is the other large company
that has announced plans to use that technology, which will compete with
technologies developed by Sun Microsystems and I.B.M.
In a statement released late last night, Ms. Fiorina said, "Clearly the
potential of this combination is compelling, but we understand the magnitude
of the challenge and the need for discipline and speed."
Late last year, Hewlett-Packard tried to expand its services business by
acquiring the consulting operations of PricewaterhouseCoopers, the
accounting firm. But that plan fell apart as Hewlett's stock price declined.
Compaq, however, has been growing its services business.
Under the deal, one Compaq share will be exchanged for 0.6325 Hewlett-
Packard share, providing a premium of around 18 percent. Compaq closed on
Friday at $12.35, down 34 cents, while Hewlett-Packard shares fell 19 cents,
to $23.21.
Compaq, which is based in Houston, began in 1982 as a maker of personal
computers. It became a phenomenal success in its first 15 years but has
stumbled more recently amid severe price wars in personal computers. Its
late 1990's acquisitions of Digital Equipment, itself once the
second-largest computer maker, and of Tandem Computers, a mainframe computer
maker, have not been viewed as great successes.
Investors in both Compaq and Hewlett-Packard have suffered in the current
decline in technology stocks, although Compaq's woes have taken a greater
toll. That stock is down 76 percent from its peak, reached in early 1999,
while Hewlett- Packard is off 66 percent from its peak, reached last summer.
"This is a decisive move that accelerates our strategy and positions us to
win," Ms. Fiorina said. "At a particularly challenging time for the I.T.
industry, this combination vaults us into a leadership role with customers
and partners."
Executives close to the talks said the negotiations have been going on for
months, leading to approval by both boards yesterday.
The deal is a vote of confidence by Hewlett-Packard's board for Ms. Fiorina,
who will become chairman and chief executive of the combined company, which
would be based in Hewlett-Packard's home town of Palo Alto, Calif.
Michael D. Capellas, the Compaq chairman and chief executive, will become
president. The companies plan to keep a strong presence in Houston where
Compaq is based.
The proposed combination could raise antitrust concerns. Any inquiry by the
Justice Department could take months to complete. The companies expect the
deal to be completed by the first half of next year.
Combined, the company will have about 145,000 employees, after layoffs
announced earlier this year are completed - 8,500 jobs at Compaq and 9,000
jobs at Hewlett-Packard. Further reductions seem likely, as the companies
said that they expected annual cost savings of $2.5 billion by the middle of
their fiscal year in 2004.
In its most recent 12 months, Hewlett-Packard reported revenues of $47
billion, while Compaq had revenues of $40 billion. The combined $87 billion
is close to the $90 billion reported by I.B.M., and far above the $33
billion for Dell Computer (news/quote), which now ranks fourth and would
move to third if the merger is completed.
In its latest financial report, for the nine months through July,
Hewlett-Packard said its net income fell 82 percent, to $506 million.
Compaq, reporting on the six months through June, said it suffered a net
loss of $201 million for the period.
Compaq had hoped that Digital Equipment technology would provide a
competitive edge in the new generations of computer servers. But it recently
chose to not use that technology, known by the Alpha name, and instead go
with the technology developed by Hewlett-Packard and Intel in its new
servers.
Both Hewlett-Packard and Compaq have been hurt by price wars in personal
computers, where it has been difficult for makers to differentiate
themselves when all except Apple Computer (news/quote) are offering
operating systems from Microsoft (news/quote).
Many in the industry hope that the trend toward decentralized computing, in
which great computing power migrated to desktops in homes and offices, will
reverse itself as a new Internet-based system uses racks and racks of
powerful computers known as servers whose computing power will be called on
by computers and cellular phones around the
world. If that vision is realized, then a major battle looms over which
maker of servers is able to gain a dominant position.
Ms. Fiorina, who will celebrate her 47th birthday on Thursday, was hailed in
1999 when she was brought in to run Hewlett-Packard with a mandate to
kick-start growth. She quickly raised forecasts of the company's growth
rate.
Initially, Wall Street hailed her and the stock performed well, rising from
$44.48 the day before she was hired to a peak of $68.09. But meeting growth
targets has proved difficult, and she was slow to cut revenue forecasts this
year as the company, and the industry, stumbled. The share price is now
little more than half its level when she was hired.
Along with job cuts, Hewlett-Packard has asked its American employees to
take a 10 percent pay cut during the current quarter or to take up to eight
paid vacation days. Taking the vacation days improves the company's reported
profits.
Mr. Capellas, 46, joined Compaq in 1998 as chief information officer and was
promoted to chief operating officer in June 1999, a month after the company
ousted its chief executive, Eckhard Pfeiffer, as the company lost ground to
Dell Computer. He became chief executive a month later. An accountant by
training, he had worked at Republic Steel and
Schlumberger before working at two major technology companies, SAP and
Oracle, before joining Compaq.
Compaq has continued to face problems since he got the job, and the stock
price is less than half the $25 it was on the day he was hired.
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