The HP/Compaq Combination Will Create a Technology Giant

In an early September deal originally valued at $25 billion, Hewlett-Packard Co. said it will buy rival computer maker Compaq Computer Corp. Carly Fiorina, chairman and CEO of H-P, will be chairman and CEO of the new H-P. Michael Capellas, chairman and CEO of Compaq, will be president of the combined firm. Capellas and four other members of Compaq’s current board of directors will join H-P’s board upon closing. The new company will be called Hewlett-Packard. “This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners,” said Fiorina. “In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial shareowner value through significant cost structure improvements and access to new growth opportunities.” The deal will be a stock transaction, accounted for by the purchase method, that is expected to close in early 2002. It will result in H-P, based in Palo Alto, Calif., owning 64% of the company. The combined company will have leading worldwide revenue positions in servers, access devices (PCs and hand-helds), imaging and printing equipment, as well as in information technology services, storage, and management software. There will be four operating units for the new H-P: services, imaging and printing, access devices, and information technology infrastructure, which includes IT services, software, and storage. The chief driver for the deal, according to executives, was competitive positioning. It comes at a time when the commodification of the PC industry, missed earnings targets, partially enacted reorganization plans at both companies, and a downturn in technology spending have negatively impacted the sector’s outlook. Despite the cheerleading of company leaders, the deal has gotten icy initial reviews from many investors. One indication of this reaction has been the shaving off of about $6 billion in deal value as both stocks sunk to five-year lows in the wake of the announcement. At presstime, the pact was valued at about $19 billion. An earlier transaction, H-P’s interest in acquiring the consulting operations of PricewaterhouseCoopers for about $15 billion, never got beyond informal talks as the would-be acquirer’s stock took a nosedive. But Fiorina and other leaders from both companies have argued that the combination of H-P and Compaq represents a quantum leap in value creation.