S&P; Downgrades HP Bond Rating; Losses in Hardware Units Cited
Hewlett-Packard Co.’s bond rating was cut three levels by Standard & Poor’s on Thursday, which said the profit outlook of the world’s second-largest computer maker would suffer with or without its planned purchase of Compaq Computer Corp.
S&P;, the New York credit-rating firm, said steep competition and mounting losses at Hewlett-Packard’s hardware units have eroded its sales and earnings.
The proposed $21.6-billion acquisition may not lift sales and profit enough to make up for the potential difficulty of integrating the two firms and the disruption to HP’s business.
“HP’s weaker profitability levels and diminished earnings predictability reflect the impact of its computer hardware segments,” S&P; said. “While the merger offers the scale and market positions in hardware that could lead to greatly improved profitability, the execution risks are significant.”
The Palo Alto-based computer maker called the downgrade “disappointing” and said its balance sheet is strong.
HP shares fell 18 cents to $20 in Thursday trading on the New York Stock Exchange. They have dropped 14% since the proposed acquisition was announced Sept. 3. Houston-based Compaq rose 17 cents to $11.15, also on the NYSE. Its shares have fallen 10% since the announcement.
S&P; trimmed HP’s corporate credit and senior debt ratings to A- from AA-. The new rating is the fourth-lowest of 10 investment grades. Its commercial paper ratings were cut to A2 from A1+.
The computer maker’s 5.75% coupon notes maturing in 2006 dropped to $988 per $1,000 face value, from $998 on Wednesday, pushing up the yield on the debt to 6.03% from 5.79%.
S&P; said Compaq’s debt may be upgraded if the purchase goes through because it’s being bought by a stronger firm.
Moody’s Investors Service lowered HP’s credit ratings in September to A2 from Aa3 because of the proposed acquisition.
HP stockholders will vote on the purchase March 19; Compaq investors meet the following day.
Separately, UBS Warburg analyst Don Young said in research notes that both companies may have used accounting to boost their fourth-quarter earnings. HP and Compaq beat analysts’ earnings estimates in the fourth quarter of 2001.
Young criticized Compaq for switching to a new revenue-recognition accounting requirement in the fourth quarter of 2001 while its competitors didn’t, saying it enabled the company to inflate profit.
Both companies denied that their accounting was improper.
*
Bloomberg News and Associated Press were used in compiling this report.
