Hewlett-Packard is acquiring Compaq Computer for an estimated $25 billion in stock, the companies announced Monday night.
The merger, if completed, would produce a company with total revenue only slightly less than that of IBM, the largest computer company. But 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 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.
Compaq, which is 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 recently. Its 1998 acquisition of Digital Equipment, itself once the second-largest computer maker, has not been viewed as a great success.
Investors in Compaq and Hewlett-Packard have suffered in the decline in technology stocks, although Compaq’s woes have taken a greater toll. That stock is down 76 percent from its peak, reached in early 1999, while Hewlett-Packard is off 66 percent from its peak, reached last summer.
While the executives involved in the talks said an agreement had been reached that provided for Hewlett-Packard to acquire Compaq, exact terms of the offer were not disclosed. They said, however, that a premium is being offered for Compaq’s stock, which closed Friday at $12.35, down 34 cents, while Hewlett-Packard shares fell 19 cents to $23.21.
The executives said Fiorina would become chairwoman and chief executive of the combined company, which will be based in Hewlett-Packard’s hometown of Palo Alto, Calif., while Michael D. Capellas, Compaq’s chairman and chief executive, will become president.
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 their most recent 12-month figures, 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 ranks fourth and would move to third if the merger is completed.
In its most recent financial report, for the nine months through July, Hewlett-Packard said its revenues were down 5 percent from the comparable period a year earlier, to $33.7 billion. But its net income fell 82 percent to $506 million. Compaq, reporting on the six months through June, said revenues fell 13 percent to $14.2 billion. It suffered a net loss of $201 million for the period, compared with a profit of $684 million in the same period of 2000.
Compaq had hoped that Digital Equipment technology would provide it with a competitive edge in new generations of computer servers. But it recently chose to not use that technology and instead go with the technology developed by Hewlett-Packard and Intel.
Hewlett-Packard and Compaq have been hurt by price wars in personal computers, where it has been difficult for makers to differentiate themselves when all except Apple Computer are offering operating systems from Microsoft.
Many in the industry hope the trend toward decentralized computing, in which great computing power migrated to desktops in homes and offices, will reverse itself as a new Internet-based system uses racks of powerful computers known as servers whose computing power will be called on by computers and cellular phones around the world.
If that vision is realized, a major battle looms over which maker of servers is able to gain a dominant position.
