Originally created 09/05/01

Hewlett-Packard deal creates computer leader



SAN JOSE, Calif. -- High-tech giant Hewlett-Packard Co. is buying Compaq Computer Corp. for about $25 billion in a blockbuster merger bringing together two rivals struggling to survive amid the battered computer industry.

The stock swap announced Monday night would create a behemoth with 130,000 employees and $87 billion in revenue - about the size of IBM Corp. - with products not only in the personal computer business but also in computer servers, printers and high-tech services.

Both Palo Alto-based HP and Houston-based Compaq have been hurt by technology sector downturns in the past year and each company imposed layoffs to deal with shrinking profits. Another 15,000 jobs will be cut due to the merger, a source close to the agreement said Tuesday. The source spoke on condition of anonymity.

Compaq and HP are Nos. 2 and 4 in worldwide PC sales, but their combined total would surpass leader Dell Computer Corp., according to the most recent figures from Gartner Dataquest. Compaq ranks first in worldwide server sales, while HP is fourth.

"This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners," said HP's chairwoman and chief executive, Carly Fiorina, who will keep those posts at the merged company.

The deal "vaults us into a leadership role with customers and partners - together we will shape the industry for years to come," Fiorina said.

The company will still be called Hewlett-Packard and will keep its headquarters in Palo Alto, though it will have a substantial presence in Houston. Compaq's chairman and chief executive, Michael Capellas, will be president.

The merger is subject to approval by shareholders and regulators, and European antitrust authorities are also expected to examine the impact of the proposed deal.

Once the merger closes, which is expected to happen in the first half of 2002, the new HP will be 64 percent owned by HP shareholders and 36 percent owned by Compaq shareholders. Capellas and four other Compaq directors will join HP's board.

"It's an extremely strong match for both firms, particularly at the executive level with Fiorina and Capellas," said analyst Rob Enderle of Giga Information Group. "She's more of the charismatic visionary, he's more of the operations person. The two of them together should be able to take the combined firm places they couldn't go separately."

HP and Compaq said the deal would save them $2 billion a year by 2003, but Gartner Dataquest research fellow Martin Reynolds said that won't be easy. Both companies, he said, have long product lines that customers will not want to see phased out.

The deal comes as the computer industry suffers through declining sales - a trend blamed on a saturated market and the slumping worldwide economy. Compaq lost $279 million in the most recent quarter; HP posted a net profit of $111 million in its last quarter, but that marked an 89 percent decline from the previous year.

In early trading, shares of Compaq were up 20 cents to $12.55, though it is still down about 75 percent from its peak in early 1999. Shares of Hewlett-Packard were off $2.20 to $21.01, more than 70 percent off its high last summer.

A source close to the deal who would only speak on condition of anonymity said the merger will result in the loss of about 15,000 jobs. The move comes on top of 8,500 announced job cuts at Hewlett-Packard and 6,000 cuts at Compaq.

In June, Capellas outlined a broad reorganization plan bringing Compaq's services division into the forefront in the company's work.

Hewlett-Packard has moved in a similar direction under Fiorina, who has brought about a broad reorganization of the 63-year-old Silicon Valley institution since taking over in 1999. Fiorina, who majored in philosophy and medieval history at Stanford University and once worked as shipping clerk at the company she now heads, has come under intense criticism in recent months for repeatedly lowering her forecasts for Wall Street. Some analysts have suggested that HP get out of the PC business, which was a money-loser for the company in the last quarter.

Compaq was founded in 1982 by three executives who left Texas Instruments: Rod Canion, Jim Harris and Bill Murto. They sketched their first product - a portable PC that could run the same software as IBM's new PC - on a paper placemat in a Houston pie shop before presenting it to venture capitalists.

Hewlett-Packard came out of similarly humble origins - it was launched in a Palo Alto garage in 1938 by the late William Hewlett and David Packard with $538 of their own money.

Associated Press Alan Clendenning contributed to this story.

On the Net:

Hewlett-Packard: http://www.hp.com

Compaq: http://compaq.com