From tomorrow's NY Times:

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May 6, 2002

Old Hewlett Prepares to Show Off Its New Look
By STEVE LOHR


Ever since Hewlett-Packard announced its plan to buy Compaq Computer last
September, A. M. Sacconaghi, a computer analyst for Sanford C. Bernstein &
Company, had been an outspoken critic of the deal.

But last Thursday -- after the long bitter proxy contest waged by Walter B.
Hewlett had finally ended, with a court ruling in favor of the company and a
concession by Mr. Hewlett -- Mr. Sacconaghi issued a buy recommendation on
Hewlett-Packard, his first in nearly two years.

He said he changed his mind for two reasons. First, Hewlett-Packard shares
have dropped about 25 percent since the deal was announced, from $23.21 a
share to $17.44 on Friday. Second, Mr. Sacconaghi pointed to "the enormous
and diligent effort" Hewlett-Packard and Compaq had put into planning how the
two companies are put together. So, he says, the new company can achieve
sizable cost-cutting gains over the next year or so, partly by eliminating
15,000 workers from a combined payroll of 150,000.

His stance sums up the net effect of the proxy fight, one of the most heated
and costly in corporate history. Mr. Hewlett's campaign of opposition has
focused investors, analysts and the company on the many hurdles that must be
overcome to make the merger a success.

Yet the counterattack of persuasion, led by Carleton S. Fiorina, chief
executive of Hewlett-Packard, resulted in a recognition, even if grudging
among skeptics, that the planning behind the integration of the two companies
has been swift and thorough.

Evidence of the progress will be announced this week. Today, shares in the
combined company will begin trading under a new stock symbol, HPQ.

But the official introduction comes tomorrow with a news conference in Palo
Alto, Calif., and presentations to employees and customers.

The 100 largest corporate customers will be told who will be handling their
accounts at Hewlett-Packard, given a thick "playbook" of the company's
product road map (which products stay and which will be eliminated over time)
and the transition plan will be detailed. Other customers, industry partners
and computer resellers will be given the product briefings soon.

The company Web site, www.hp.com, has been fine-tuned so that starting
tomorrow, customers should be able to get information on products from both
companies using an integrated search feature. The next paycheck that the
former Compaq employees receive will have the Hewlett-Packard logo. Signs at
the Compaq sites will begin changing next week -- Hewlett-Packard is the
surviving corporate name, and preferred rendering for most purposes will
simply be HP.

Three layers of management in the new company, more than 15,000 people
worldwide, will be named tomorrow. Employees will be welcomed to the new
company and told of changes in briefings from executives, written materials
and Webcasts. About two dozen executives from Compaq's offices in Houston
will be moved to the Hewlett-Packard headquarters in Palo Alto.

The proxy contest focused mainly on how efficiently the two companies could
consolidate their operations -- that is, heated debates over the projections
of cost-savings and the estimates of revenue losses from eliminating
overlapping product lines. Mr. Hewlett argued that the company's management
was overestimating the cost savings and underestimating the revenue losses.

Yet most analysts agree that the company seems to have made solid progress
toward wringing greater efficiency and cost-savings from combined company,
even without accepting the Hewlett-Packard projections. Mr. Sacconaghi, for
example, shaved 25 percent off the company's cost-savings estimates and
assumed greater revenue losses than the company, and still determined
Hewlett-Packard shares were attractive because the price has declined so
much. The all-stock purchase, which was valued at $25 billion when it was
announced, was worth less than $19 billion when it was completed last week.

But the larger test will be whether the strategy behind the deal
materializes.

"In the short term, we will see radical cost-cutting, and that will create
value," said David Yoffie, a professor at the Harvard Business School who was
a critic of the deal. "But ultimately this business is not about
cost-cutting. For HP to thrive, will require innovation and gaining market
share."

The merger is a bet that the combined company can indeed become a
computer-industry powerhouse in a way that neither Hewlett-Packard nor Compaq
is today.

"The only reason for making a big strategic move like this is to gain
leadership," said Michael D. Capellas, the former chief executive of Compaq,
who is now president and chief operating officer of Hewlett-Packard.

The Hewlett-Packard strategy is to become the leading supplier of
industry-standard technology to corporate data centers. Industry standard
computing typically means the technology of personal computing -- Microsoft's
Windows operating system or the Linux operating system, running on Intel
microprocessors.

The Hewlett-Packard bet is that it can bring the economics of personal
computing into large corporate data centers, thus undercutting the
data-center leader, I.B.M., which has higher profit margins. But
Hewlett-Packard is also hoping that data-center computing will require
expertise in designing big systems and supplying services that is beyond the
capabilities of the current champion of the PC industry, Dell Computer.

The larger ambition, a basic rationale for the deal, is the one that is most
in doubt, even among supporters of the Compaq merger. "On the cost savings
alone, the deal could well make sense," said Steven Milunovich, an analyst
for Merrill Lynch, who endorsed the Compaq purchase. "But for it to be a real
success, Hewlett-Packard has to have a clear strategy to gain market share.
I'm still skeptical about that."

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