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Hewlett Lifts Profit Outlook and Each Side in War Exults

February 5, 2002

By STEVE LOHR




Hewlett-Packard (news/quote) announced yesterday that its
first-quarter earnings would be "substantially above" Wall
Street's estimates because of stronger sales of personal
computers and printers and reduced expenses.

Both sides in the spirited proxy contest over
Hewlett-Packard's plan to buy Compaq Computer (news/quote)
pointed to the performance, which was better than expected,
as proof of their claims.

Carleton S. Fiorina, the chief executive of
Hewlett-Packard, said the announcement was evidence that
the company had not lost focus on its business and that
customers were not defecting, despite worries from critics
that planning the merger would prove to be a debilitating
distraction.

A spokesman for Walter B. Hewlett, an heir of the
co-founder and the leading opponent of the deal, said the
improved performance suggested that the company was in
solid shape, so there was no justification for gambling
with Hewlett-Packard's future by acquiring Compaq.

Ms. Fiorina, speaking to hundreds of investment bankers and
institutional investors at a conference in California,
expressed optimism that the proxy fight was finally turning
in management's favor.

Immediately after the big merger plan was announced in
early September, the Wall Street reaction was skeptical.
Later, the heirs of the founders and the foundations they
control declared they would vote their 18 percent of
Hewlett-Packard shares against the deal.

But Ms. Fiorina told her audience yesterday: "I come here
today confident that we have turned the corner on this
merger. The momentum is shifting."

Last week, the European Commission said it would raise no
antitrust challenge to the proposed merger. And Compaq
reported earnings last month that were better than
analysts' reduced expectations after Sept. 11.

"Today's positive earnings update - just like last month's
earnings announcement by Compaq and our fourth-quarter
results before that - proves what the people of these two
companies can accomplish," Ms. Fiorina said at the
conference, which was sponsored by Goldman, Sachs &
Company. "We aren't distracted by the merger or the
challenge of integration. And our customers aren't
defecting."

The spokesman for Mr. Hewlett disputed Ms. Fiorina's
assessment of the campaign for shareholder votes. Most
investors polled by the opposition camp remained against
the deal, he said. The improvements in the quarterly
outlook, he added, "demonstrate the underlying strength of
the company and point out the inherent fallacy of a
bet-the-company merger with Compaq."

Hewlett-Packard said that its earnings for its first fiscal
quarter, ended Jan. 31, should be well above the Wall
Street consensus estimate of 16 cents a share. In November,
the last time management briefed analysts, Hewlett-Packard
said it expected revenue to be soft and expenses to be
roughly the same as the previous three months.

But after a falloff in sales and consumer confidence after
Sept. 11, demand for PC's and printers has rebounded more
quickly than anticipated. The consumer market in December,
typically a strong one for holiday sales of PC's, seems to
have returned to normal, analysts said.

By yesterday afternoon, six Wall Street analysts - a third
of those who follow Hewlett-Packard - had reported revised
earnings estimates for the quarter. The new consensus
estimate was 25 cents a share, up from 16 cents, according
to Thomson Financial/First Call, which tracks analysts'
earnings forecasts.

Hewlett-Packard's revenue for the quarter will probably
reach $11.2 billion, said Don Young, an analyst for UBS
Warburg, or $300 million higher than his previous estimate.


But Mr. Young, a skeptic on the Compaq merger, still
questioned whether the improved earnings prospects for the
quarter would sway shareholders. A vote has not been
scheduled, but will probably come sometime in March.

"I doubt if anybody's view of the deal will be based on a
single quarter's results, one way or the other," Mr. Young
said.

http://www.nytimes.com/2002/02/05/technology/05HEWL.html?ex=1013942295&ei=1&en=6e8b3f2d4f578136



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