Hewlett-Packard Co agreed to buy Compaq Computer Corp for US$25 billion in stock, as the second-biggest computer maker tries to take on larger rival International Business Machines Corp in services and consulting.
Compaq shareholders will get 0.6325 of a Hewlett-Packard share for each share they own, Compaq spokesman Arch Currid said. Hewlett-Packard shareholders will own 64 percent of the combined company, to be run by Carly Fiorina, the Palo Alto, California-based company's chairwoman and chief executive.
Sales of personal computers, printers and related equipment have tumbled this year, dragging down Hewlett-Packard's net income 89 percent in the most recent quarter.
Fiorina is betting that combining with Compaq will speed growth in computer services, a higher-profit business that she's stressed as the key to rejuvenating sales. Analysts criticized the move, saying it may not generate the growth and savings Fiorina wants.
"It really doesn't make any sense," said Ashok Kumar, a US Bancorp Piper Jaffray analyst. "It will be a big distraction for H-P. In hindsight, this will probably not go down as a good acquisition." The agreement values Compaq at US$14.68 a share, or 19 percent more than Friday's closing price. Michael Capellas, chairman and CEO of Houston-based Compaq, will become president of the combined company. Capellas and four other Compaq directors will join Hewlett-Packard's board, the companies said.
The transaction will result in savings of US$2 billion in fiscal 2003, the companies said. They expect the acquisition, already approved by both boards, to be completed in the first half of next year. Currid declined to elaborate ahead of a news conference later today. Hewlett-Packard officials couldn't be reached to comment.
"At a particularly challenging time for the industry, this combination vaults us into a leadership role with customers and partners," Fiorina said in a statement.
The two companies sell PCs, servers that run Internet sites and corporate networks and related services and consulting. Both have focused on increasing services revenue this year, trying to make up for falling PC prices and challenge IBM, whose services business has helped it weather the slowdown in corporate spending caused by sagging economic growth.
IBM, the biggest seller of computers and related services, had sales of US$21.6 billion in its most recent quarter, while Compaq sales had US$8.45 billion and Hewlett-Packard's were US$10.1 billion.
The similar strategies at Hewlett-Packard and Compaq left them with a lot of overlapping product lines, analysts said. Compaq's PCs and servers are too much like Hewlett-Packard's lineup, Kumar said.
Demand hasn't rebounded after a dismal holiday sales season last year, as consumers and corporations worry about the economy and put off purchases.
PC shipments in the calendar second quarter dropped from a year ago for the first time since 1986, according to researcher Dataquest Inc.
Compaq, Hewlett-Packard and rivals like Gateway Inc and Dell Computer Corp all have fired thousands of workers this year. IBM is the only large PC company that hasn't cut jobs to trim costs.
Compaq, which plans to fire 8,500 workers this year to cope with the sales slowdown, lost its spot as the biggest PC seller to Dell in the past two quarters. After trying to match Dell's PC price cuts earlier this year, Compaq backed off that strategy and has since tried to focus on more profitable sales. The company's profit fell 81 percent in the second quarter and sales dropped 17 percent.
Hewlett-Packard will fire 7,000 people this year and has asked employees to take vacation days and pay cuts to pare costs. While Hewlett-Packard has refused to chop PC prices as steeply as other manufacturers, the company has reduced the cost of low-end printers to stave off competition in that market, traditionally its most profitable business. The company's sales fell 14 percent in the third quarter ended in July.
The slowdown could make it harder for Hewlett-Packard to integrate Compaq into its business, analysts said. Bringing new employees up to speed, reassuring customers and finding redundant functions in such big deals takes months.
"There's going to be a period of uncertainty," said IDC analyst Dane Anderson. "There's little way to escape uncertainty and confusion internally and externally for six to nine months." Together, Hewlett-Packard and Compaq would have had about 18 percent of the worldwide personal-computer market in the second quarter, according to Dataquest. By contrast, Dell held 13.1 percent of the PC market.
Fiorina, who considered buying PricewaterhouseCoopers LLC's consulting arm last year to bolster her company's services unit, may be most interested in Compaq's growth in that area.
Still, about 55 percent of Compaq's services business is low-end technical support, Kumar said. That's not going to be much help to Fiorina, he said.
Other analysts said it will take more time to judge the outcome because an acquisition of this size takes months to work through. Hewlett-Packard is the biggest printer maker, while Compaq has recently had success with its line of iPaq handheld organizers.
"Conceptually, it makes sense -- the question is in the execution," said Dan Niles, a Lehman Brothers analyst. "You can't just take the market shares of both companies and add it together." Compaq, which bought Digital Equipment Corp in 1998, has stumbled in its efforts to reorganize the company around its services business. Since Capellas became CEO, he has restructured Compaq three different times. That doesn't bode well for Hewlett-Packard's chances, analysts said.
"Compaq bought Digital for services," said Ian Bertram, a regional director at Gartner Group in Singapore. "They haven't made a particularly good showing of services. Now H-P buys Compaq -- how much baggage is going to come with this?"
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