Computer Giant to Buy Rival Compaq
Hewlett-Packard Co. said late Monday that it will buy Compaq Computer Corp. for $25 billion in stock, lashing together two of the world’s largest computer firms in a bid to ride out the biggest slump in the industry’s history.
The combined companies, to be headed by HP Chief Executive Carly Fiorina, would control an estimated 70% of the retail personal computer market and as a computer company rank second in sales only to IBM. In PC sales, it would surpass fast-growing Dell Computer Corp., which has slashed prices and gouged the profits of both HP and Compaq.
Stocks in all of the computer companies have slumped this year as shipments have fallen for the first time in at least 15 years. The companies have tried to sell more than PCs as the machines have turned into commodities. And HP has been especially aggressive, pursuing a multibillion-dollar acquisition of consulting firm PricewaterhouseCoopers until shareholders balked.
Although many industry analysts predicted consolidation in the crowded and profit-starved world of personal computers, few expected a massive alliance like this one. Many, in fact, have urged HP to get rid of PCs entirely to focus on its profitable printer business and its high-end computer servers and mainframes for corporations.
But Fiorina said the union would allow massive savings combining two previously fierce competitors.
“In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial share-owner value through significant cost structure improvements,” she said in a statement. “This combination vaults us into a leadership role with customers and partners.”
The acquisition would create a behemoth with about 145,000 employees, $87 billion in annual sales and $3.9 billion in operating profit, pitting it against IBM, server maker Sun Microsystems Inc. and the major direct-sellers of smaller computers, Dell and struggling Gateway Inc.
“It might seem like a combining of two weaklings to be stronger, but each of them bring some things to the party,” said consultant Tim Bajarin of Creative Strategies. “At the very least, putting their forces together creates a more powerful force in the marketplace.”
Both Compaq and Hewlett-Packard rely on Microsoft Corp. operating systems and Intel Corp. processors for most of their machines. But HP also has followed IBM in embracing machines tooled to run Linux, the free operating system that has been gaining ground against Microsoft in the race to run corporate networks.
Compaq CEO Michael Capellas, on the job not much longer than Fiorina’s two years, would serve as president of the new company. Both companies have already announced layoffs as their profits have fallen. Additional cuts and streamlined manufacturing would save the merged company an estimated $2.5 billion annually.
Compaq shareholders would get 0.6325 of a newly issued HP share for each share of Compaq. HP shareholders would own 64% and Compaq shareholders 36% of the resulting company. And HP would continue to be based in Palo Alto, where it was founded in a garage that is now a landmark as the birthplace of Silicon Valley.
The stock swap would give Compaq shareholders a premium of about 19% over Friday’s closing price. Pending regulatory and shareholder approval, the purchase is expected to close in the first half of next year. Details will be given at a news conference today.
The merger might dismay HP shareholders, who were sharply critical of that company’s earlier attempt at Pricewaterhouse, as well as Compaq investors, who see that firm’s poorly digested acquisition of big computer maker Digital Equipment Corp. as a major source of Compaq’s problems.
And the combination does little to combat the leaner and meaner approach pioneered by Dell, which has no retail stores, lower overhead and smaller inventory--a costly factor in the fast-upgrading world of high technology.
“Dell will take advantage of the chaos,” said Ashok Kumar, analyst with U.S. Bancorp Piper Jaffray. “And you will see pure-play companies like Sun get more aggressive on the server side.”
But because Compaq and HP have so much clout in stores, they now stand to gain by controlling the experience of many of the computer buyers who want to touch before they buy.
Kumar said the combined firm would have about 70% of the retail PC market (excluding direct sales such as Dell’s)--probably not enough to bring fatal opposition from U.S. antitrust authorities but possibly enough to cause problems at the European Union.
HP might be most drawn to Compaq’s services business, which accounts for about $2 billion in sales each quarter, with a 13% operating profit margin.
Bajarin said Fiorina and the HP board, frustrated in last year’s run at Pricewaterhouse, “never lost that desire” to buy their way into the lucrative technology consulting business. Compaq’s acquisition of DEC gave it a talent pool that HP wants.
But that business to date is largely routine maintenance, not the more prized systems integration in which IBM has done so well.
And both HP and Compaq have sometimes failed to efficiently deliver profitable, competitive products that companies and consumers wanted.
“HP, to begin with, has not executed at all. Compaq is another entity that is upside-down. They have not executed from time immemorial,” Kumar said.
The result is that the bottom line of one of the largest technology acquisitions ever is far from clear, he said. “It will be not quarters but years before we can make a final judgment” on the merits of the deal, Kumar said.
