Hewlett-Packard buying Compaq for $25 billion

Brian Bergstein

Tuesday, Sept. 4, 2001 | 11:04 a.m.

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 creates a behemoth that currently has 150,000 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, Calif.-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 as the companies combine, lowering the eventual total work force to 135,000, Compaq Chief Executive and Chairman Michael Capellas said at a meeting with analysts.

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 Hewlett-Packard CEO and Chairwoman Carly Fiorina, who will head the new 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 in a statement.

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. Capellas will stay on as 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. Fiorina told analysts that the companies were willing to make divestitures to see the deal through, though she did not elaborate.

After 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."

In morning trading, shares of Compaq were up 14 cents to $12.49, though it is still down about 75 percent from its peak in early 1999. Shares of Hewlett-Packard were off $2.41 to $20.80, more than 70 percent off its high last summer.

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 new HP will continue to face short-term challenges as well. Revenue for the next two years is projected to dip by less than 5 percent, said HP's Bob Wayman, who remain as chief financial officer.

About three-quarters of the synergy between the two companies are related to the 15,000 job cuts, Wayman added. The streamlining will come on top of 8,500 cuts at Hewlett-Packard and 6,000 cuts at Compaq already announced this year.

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 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.

Fiorina said Hewlett-Packard planned to continue to sell PCs, however. "It will be critical that we maintain our focus and protect our existing businesses," she said.

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.

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