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September 4, 2001

Hewlett-Packard to Acquire Compaq in $25 Billion Deal

By ANDREW ROSS SORKIN and FLOYD NORRIS

The Associated Press

Hewlett-Packard is said to be close to acquiring Compaq Computer for $25
billion in stock.

Hewlett-Packard (news/quote) will announce today that it is acquiring Compaq
Computer (news/quote) for $25 billion in stock in a bold move to grow as the
computer business struggles with shrinking sales, executives close to the
negotiations said last night.

The merger, if completed, would produce a company with total revenue only
slightly less than that of I.B.M. (news/quote), the largest computer company.
But both Hewlett-Packard and Compaq have recently seen revenue slide and
profit plunge because of a computer industry slowdown, and both have
announced job cuts.

The merger of the two computer giants could create a stronger competitor for
Sun Microsystems (news/quote) and I.B.M. in the server computer market while
putting pressure on I.B.M., Dell and Gateway in the personal computer
business. The executives said the merged company would be in a position to
compete with I.B.M. across virtually its entire product line.

For Carleton S. Fiorina, who became chief executive of Hewlett- Packard in
1999 when she was hired away from Lucent Technologies (news/quote), 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 (news/quote) 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 I.B.M.

Late last year, Hewlett-Packard tried to expand its services business by
acquiring the consulting operations of PricewaterhouseCoopers, the large
accounting firm. But that plan fell apart as Hewlett's stock price declined.
Compaq, however, has been seeking to grow its own services business.

Proposed terms of the deal, the executives said, called for one Compaq share
to be exchanged for about 0.63 Hewlett-Packard share, providing a premium of
around 18 percent. Compaq closed on Friday at $12.35, down 34 cents, while
Hewlett-Packard shares fell 19 cents, to $23.21.

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 more recently amid severe price wars in personal computers. Its late
1990's acquisitions of Digital Equipment, itself once the second-largest
computer maker, and of Tandem Computers, a mainframe computer maker, have not
been viewed as great successes.

Investors in both Compaq and Hewlett-Packard have suffered in the current
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.

The executives said the talks had been going on for months, leading to
approval by both boards yesterday.

They said that Ms. Fiorina would become chairman and chief executive of the
combined company, which would be based in Hewlett-Packard's home town of Palo
Alto, Calif., while Michael D. Capellas, the Compaq chairman and chief
executive, would become president.

Spokesmen for both companies declined to comment last night.

When 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 that they expect annual cost savings of $2.5
billion within several years.

In its most recent 12 months, 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 I.B.M., and far above the $33 billion
for Dell Computer (news/quote), which now 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, known by the Alpha name, and instead go
with the technology developed by Hewlett-Packard and Intel in its new servers.

Both 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 (news/quote) are offering operating systems
from Microsoft (news/quote).

Many in the industry hope that 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 and 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, then a major battle looms over which maker of servers is able to
gain a dominant position.

Ms. Fiorina, who will celebrate her 47th birthday on Thursday, was hailed in
1999 when she was brought in to run Hewlett-Packard with a mandate to
kick-start growth at the company. She quickly raised forecasts of the
company's growth rate and even made a television commercial standing in front
of the Palo Alto garage to which the company traces its roots.

Initially, Wall Street hailed her and the stock performed well, rising from
$44.48 the day before she was hired to a peak of $68.09. But meeting growth
targets has proved to be much more difficult than announcing them, and she
was slow to cut revenue forecasts this year as the company, and the industry,
stumbled. The share price is now little more than half where it was when she
was hired.

In addition to job cuts, Hewlett- Packard has asked its American employees to
take a voluntary 10 percent pay cut during the current quarter or to take up
to eight paid vacation days. Taking the vacation days improves the company's
reported profits by reducing the accrued vacation pay it must carry as a
liability on its books.

Mr. Capellas, 46, joined Compaq in 1998 as chief information officer and was
promoted to chief operating officer in June 1999, a month after the company
ousted its chief executive, Eckhard Pfeiffer, as the company lost ground to
Dell Computer. He became chief executive a month later after the company said
it had interviewed 75 people for the top job. An accountant by training, he
had worked at Republic Steel and Schlumberger before working at two major
technology companies, SAP and Oracle, before joining Compaq.

Compaq has continued to face problems since he got the top job, and the
current stock price is less than half the $25 it was on the day he was hired.

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