- The Washington Times - Wednesday, September 5, 2001

Hewlett-Packard's proposed purchase of rival Compaq Computer Corp. caught technology analysts by surprise yesterday, exciting them at first but later yielding to caution.

Hewlett-Packard, of Palo Alto, Calif., said yesterday it would buy Compaq for an estimated $25 billion, creating an industry giant that would have a hold of about 40 percent of the nation's consumer market.

"It was quite a surprise it's one of the largest tech mergers ever, so it's huge," said Jeremy Lopez, analyst with Morningstar in Chicago. "There's a lot of potential here … it looks formidable on paper, but by and large the challenge is overwhelming … there are more questions as to how smooth this is going to go from an investment point."

Investors frowned at the news, dumping shares of the companies until both personal-computer makers hit their 52-week lows on the New York Stock Exchange. Hewlett-Packard's stock slipped 19 percent, its biggest drop since 1987, closing at $19. Shares of Compaq, of Houston, suffered as well, closing at $11.08, down $1.27 from Friday, the last day of trading. The stock markets were closed Monday in observance of Labor Day.

Both companies have been hit hard by sluggish sales amid a slowing economy. The drops in their stock prices yesterday decreased the value of the all-stock deal to $20.2 billion from $25 billion, analysts said.

Even united, the two computer makers would remain behind IBM, their main competitor, which would remain the nation's largest PC maker.

IBM's sales last year were a staggering $88.4 billion, and net income was $8.09 billion ($4.44 per diluted share). Diluted shares reflect the value of options, warrants and other securities convertible into common stock.

Hewlett-Packard's sales were $48.78 billion and income $3.7 billion ($1.80). Compaq's sales were $42.38 billion and income $569 million (33 cents).

"The market hates this, and I don't think anybody is really focusing on the regulatory issues, but more on really, does this make sense, should it happen, and why are you killing the stocks that's what the stockholders are asking now," said Tom Burnett, president of Merger Insight, a New York firm focusing on mergers and acquisitions from a shareholder's perspective.

The deal sparking a round of consolidation in the industry is unlikely, he added. Dell and Gateway are the only two major competitors left in PC manufacturing, and the market's reaction to yesterday's news does not set a favorable precedent for potential deals.

"Do you think someone wants to get involved in having their stock pounded 15, 20 percent? I don't think so," he said.

But the companies' managers were optimistic yesterday.

Carly Fiorina, chief executive officer of Hewlett-Packard, said she hopes that adding Compaq will rack up profits and increase the PC maker's piece of the personal-computer sales pie.

Ms. Fiorina, who will be chief executive and chairman of the combined company, also announced during a conference call yesterday that some 15,000 jobs will be cut following the acquisition.

"Today is about changing the game, not only for our two companies but for the industry as well," she said, adding that she met Michael Capellas, Compaq's chief executive officer, at a public policy conference several months ago where they realized they shared many ideas.

"We had a common vision of where the industry was going," she added.

The most positive aspect of the deal, analysts said, was that it likely would fuel price wars with rival PC makers like Dell and Gateway, which would mean cheaper computers for consumers.

"When you go in the store, there could be some interesting opportunity to buy a printer made by Hewlett that will adapt easily to Compaq," Mr. Burnett said. "And [the deal] is not going to mean big price increases [of Hewlett-Packard products] because there are many other places to go it's not like these are the only two guys who make PCs and laptops."

The companies, which expect to close the deal early next year, did not say if either brand would be shed. But analysts speculated few products would keep the Compaq name.

Compaq stockholders will receive 0.6325 of a Hewlett-Packard share per share held, valuing the company at $14.68 a share, said Arch Currid, a Compaq spokesman.

Hewlett-Packard stockholders will own 64 percent of the company.

The companies said yesterday they expect the deal to save them $2 billion in fiscal 2003.

"In my opinion, the cost savings that were talked about today are best-case scenario," said Shebly Seyrafi, an analyst with A.G. Edwards & Sons. "Hewlett-Packard will have a massive integration challenge ahead of itself … they have a lot of work, on the cost side, to make this work."

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