Compaq Computer Corp Chief Executive Officer Michael Capellas touted the benefits of Hewlett-Packard Co's proposed US$19.8 billion takeover of the company this month at a Gartner Inc forum in Orlando, Florida. Then he danced.
As an audience of 5,000 watched, Capellas sat on stage for 45 minutes and answered questions from Gartner analysts Jennifer Beck and Carl Claunch. Afterward, the CEO stood up, took Beck by the arms and glided into a mambo to the song "Mambo Italiano." Even some of the sale's harshest critics may have started to follow his lead. Compaq's shares have risen 18 percent since Oct. 2, a day after the company said it had a third-quarter loss as sales fell by a third. Final results were due out yesterday.
The stock's gain suggests investors are starting to agree with Capellas that Compaq, second to Dell Computer Corp among personal-computer makers, is better off being sold than staying independent.
"We're not a huge fan of the merger, but it does make some sense" by allowing the bigger company to challenge International Business Machines Corp, the biggest computer maker, said Todd Ahlsten, director of research at Parnassus Investments.
The firm bought 500,000 Compaq shares and 150,000 H-P shares in October, because both stocks became undervalued, Ahlsten said. The firm had sold 75,000 H-P shares shortly after the deal was announced Sept. 3.
Compaq's shares dropped 46 percent last quarter, when sales fell by US$3.7 billion from the year-earlier period. Customers weren't sure whether to buy from a company being acquired, while a typhoon in Taiwan hampered production, and global economic growth slowed. The Sept. 11 terrorist attacks added to the slump.
"It was almost the perfect storm," Capellas said after the Houston-based company announced that results would trail analysts' third-quarter forecasts.
Compaq estimated on Oct. 1 that it had a third-quarter loss from operations of US$0.05 to US$0.07 a share, rather than the average forecast for a US$0.05 profit among analysts surveyed by Thomson Financial/First Call. Sales totaled US$7.4 billion to US$7.5 billion. In the year-earlier period, Compaq had net income of US$550 million, or US$0.30, on sales of US$11.2 billion.
Capellas, 47, was unavailable to comment, spokesman Arch Currid said. The company paid its CEO US$29.7 million in cash and stock last year. He will be H-P's president after the sale.
At the beginning of last quarter, Capellas talked about restructuring Compaq for the third time since he became CEO in July 1999. He had pared distributors and merged the company's corporate and consumer PC divisions.
Compaq's sales plummeted in 2001 as the PC market sank into its steepest slump in more than a decade. Sales this year are expected to decline for the first time since 1985, according to market researcher IDC.
"PCs are a commodity now," Gartner's Beck said. "Most of the margins have been squeezed out."
Beck said she doesn't own shares of Compaq or Dell.
Compaq is cutting 8,500 jobs, a 12 percent drop, this year and has reduced inventories by more than US$1 billion.
Capellas aimed to sell more services and to reduce PCs to about a third of sales from 45 percent in the second quarter. He found that he couldn't do that without selling the company.
The CEO and his H-P counterpart, Carly Fiorina, have promoted the combination by noting that it will sell more-profitable services such as setting up and maintaining corporate networks. Services are forecast to make up 19 percent of total sales.
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