H-P buys Compaq Computer

By Andrew Ross Sorkin And Floyd Norris

New York Times

Hewlett-Packard will announce today that it is acquiring Compaq Computer for $25 billion in stock in a bold move to grow as the computer business struggles with shrinking sales, executives close to the negotiations said.

The merger, if completed, would produce a company with total revenue only slightly less than that of IBM, the largest computer company. But both Hewlett-Packard and Compaq have recently seen revenues slide and profits plunge because of a computer industry slowdown, and both have announced job cuts.

For Carleton S. Fiorina, who became chief executive of Hewlett-Packard in 1999 when she was hired away from Lucent Technologies, 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 and Hewlett-Packard. Compaq is the other large company that has announced it plans to use that technology, which will compete with technologies developed by Sun Microsystems and IBM.

Late last year, Hewlett-Packard had tried to move in a different direction that emphasized services by acquiring the consulting operations of PricewaterhouseCoopers, the large accounting firm. But that plan fell apart as Hewlett’s stock price declined.

Proposed terms of the deal, the executives said, called for one Compaq share to be exchanged for about 0.63 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, 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 1998 acquisition of Digital Equipment, itself once the second-largest computer maker, has not been viewed as a great success.

The executives said the talks had been going on for months, leading to approval by both boards Monday.

They said that Fiorina would become chairman and chief executive of the combined company, which would be based in Hewlett-Packard’s home town of Palo Alto, Calif., while Michael D. Capellas, the Compaq chairman and chief executive, would become president.

Spokesmen for both companies declined to comment Monday night.

The proposed combination could raise antitrust concerns. Any inquiry by the Justice Department could take months to complete.

When the announced job reductions — of 8,500 jobs at Compaq and 9,000 at Hewlett-Packard — are completed, employment at the companies will be about 62,800 at Compaq and 87,000 at Hewlett-Packard. Further reductions seem likely, as executives said they expect annual cost savings of $2.5 billion within several years.

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 IBM, and far above the $33 billion for Dell Computer, which now ranks fourth and would move to third if the merger is completed.