HP to Buy Compaq in $25 Billion Deal

Two of the biggest names in the PC market are joining forces. In a deal announced on Tuesday, Hewlett-Packard will acquire Compaq Computer in an all-stock purchase valued at $25 billion.

After the deal is completed, HP will become one of the largest information technology companies in the world.

Based on figures reported for the last four quarters, the combined company would have annual sales of $87.4 billion and an annual operating income of $3.9 billion. In contrast, IBM reported total sales of $90.1 billion in the last four reported quarters.

The deal, which has been approved by the boards of both companies, will see Compaq shareholders receiving 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 2002, HP shareholders will account for approximately 64 percent of the new company's stockholders. Carly Fiorina, chair and chief executive officer of HP, will retain her position while Michael Capellas, chair and chief executive officer of Compaq, will be president. Four additional board members from Compaq will join Capellas on the board of HP.

Product Plans

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

"At the high end, they don't compete head to head. Their competition is IBM and Sun," he says. "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 will be the largest of the four in revenue terms, based on the last four quarters, with estimated sales of $29 billion. It will be led by Duane Zitzner, currently president of the computing systems division of HP.

The IT Infrastructure division will include the company's servers, storage, and software operations and have estimated revenues of $23 billion. Peter Blackmore, currently executive vice president of sales and services at Compaq, will lead the division.

The Imaging and Printing division will be led by Vyomesh Joshi, who currently holds the position of president at a similar division at HP. Its estimated revenues will be $20 billion.

The smallest of the four divisions, in revenue terms, will be the Services business. Led by Ann Livermore, who is currently president of HP's services division, it will employ almost half of the combined workforce of the company--some 65,000 staff.

This division is a key focus for the combined entity, according to Bertram.

"The big question is whether [the merged company] can achieve critical mass [in the services business]," he says. "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?"

Ready to Reorganize

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

Those improvements will come as the company cuts product lines, manufacturing, 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 says.

Staff of both companies, which will number around 145,000 people in 160 countries after the merger, are also likely to be affected as many duplicate positions are merged. Details were not provided in the statement, but the companies did say the headquarters of the new company will remain in Palo Alto although a "significant presence" will be retained in Houston where Compaq is currently headquartered.

"There is going to be a lot of trepidation among the troops," says 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 well as part of an overall rationalization process that will take between 12 and 18 months, Bertram says.

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