HP to buy Compaq in $25B deal

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Hewlett-Packard Co. and Compaq Computer Corp. yesterday announced a deal under which HP will acquire Compaq in an all-stock purchase valued at $25 billion.

If the deal goes through, HP would become one of the world's largest IT companies. Based on figures reported for the past four quarters, the combined company would have annual sales of $87.4 billion and an operating income of $3.9 billion. That's slightly less than IBM's total sales of $90.1 billion in the past four quarters.

Carly Fiorina, chairwoman and CEO of HP, would retain her position, while Michael Capellas, chairman and CEO of Compaq, would become president. Four additional board members from Compaq would join Capellas on HP's board.

The acquisition, which has been approved by the boards of both companies, would see Compaq shareholders receive 0.6325 of a new HP share for each Compaq share they hold. After the merger, which is expected to close in the first half of next year, HP shareholders would account for approximately 64% of the new company's stockholders.

In product terms, the companies make a good fit, according to Ian Bertram, regional director of hardware platforms at Gartner Inc.'s Dataquest Asia-Pacific unit.

"At the high end, they don't compete head-to-head. Their competition is IBM and Sun," he said. "In the PC market, they fight against Dell, and in handhelds, against Palm. But there will still have to be a huge rationalization of the product line and the branding."

The new HP will have four main divisions:

  • The Access Devices division would be the largest of the four in terms of revenue, based on the past four quarters, with estimated sales of $29 billion. It would be led by Duane Zitzner, who is currently president of the computing systems division at HP.
  • The IT Infrastructure division would include the company's servers, storage and software operations and have an estimated annual revenue of $23 billion. Peter Blackmore, currently executive vice president of sales and services at Compaq, would lead the division.
  • The Imaging and Printing division would be led by Vyomesh Joshi, who currently holds the position of president at a similar division at HP. Its estimated revenue would be $20 billion.
  • The smallest of the four divisions, in terms of revenue, would be the Services business. Led by Ann Livermore, who is currently president of HP's services division, it would employ almost half of the combined workforce of the company -- some 65,000 staffers. The services division is a key focus for the combined entity, according to Bertram.

"The big question is whether they can achieve critical mass [in the services business]," Bertram said. "Compaq has been unable to grow its services business despite buying Digital, while HP has been trying to grow organically. Do two struggling services companies equal a good business model?"

In a joint statement issued by both companies, Fiorina called the acquisition a "decisive move" and said it will provide "significant cost structure improvements."

Those improvements will come as the company cuts product lines, manufacturing systems and distribution systems made obsolete by the merger. In total, the deal is expected to create savings of $2 billion in fiscal 2003 and $2.5 billion by mid-fiscal 2004, the statement said.

Staffers from both companies, who would total about 145,000 people in 160 countries after the merger, are likely to be affected as many duplicate positions are merged. Details weren't provided in the statement. However, the companies did say the headquarters of the new company will remain in Palo Alto, Calif., although a "significant presence" will be retained in Houston, where Compaq is based.

"There is going to be a lot of trepidation among the troops," said Bertram. "All their employees in duplicated positions will be looking over their shoulders and will effectively have to apply for their jobs again. This will have to be done in a fair and equitable way, which will take a long time."

Some manufacturing plants belonging to the two companies are likely to close as part of an overall rationalization process that will take between 12 and 18 months, Bertram said.

"This will also be devastating for some distributors and resellers, particularly those who deal exclusively in either company's products," Bertram said.

The deal comes as the stock prices of both companies are languishing near 12-month lows. Shares in HP closed at $23.21 on Friday, just above the 52-week low of $23.01 and well off its 52-week high of $62.81, while those of Compaq closed at $12.35 and have traded in a range between $33.37 and $12.27 in the past 12 months.

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