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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. ************************************************************************************ Distributed through Cyber-Society-Live [CSL]: CSL is a moderated discussion list made up of people who are interested in the interdisciplinary academic study of Cyber Society in all its manifestations.To join the list please visit: http://www.jiscmail.ac.uk/lists/cyber-society-live.html *************************************************************************************