Hewlett moves to buy Compaq

$25 billion stock deal to create No. 2 to IBM


Hewlett-Packard Co. will announce today that it is acquiring Compaq Computer Corp. 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 IBM Corp., the largest computer company. But both Hewlett-Packard and Compaq have recently seen revenues slide and profits plunge because of a computer industry slowdown, and both have announced job cuts.

For Carleton S. Fiorina, who became chief executive of Hewlett-Packard in 1999 when she was hired away from Lucent Technologies, 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 Corp. 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 Microsys- tems Inc. and IBM.

Last year, Hewlett-Packard had tried to move in a different direction that emphasized services by acquiring the consulting operations of PricewaterhouseCoopers, the large accounting firm. But that plan fell apart as Hewlett's stock price declined.

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 1998 acquisition of Digital Equipment has not been viewed as a great success.

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.

While the executives involved in the talks said that an agreement had been reached that provided for Hewlett-Packard to acquire Compaq, exact terms of the offer were not disclosed. They said, however, that a premium is being offered for Compaq's stock, which closed Friday at $12.35, down 34 cents, while Hewlett-Packard shares fell 19 cents to $23.21.

The executives said Fiorina would be chairman and chief executive of the combined company, which will be based in Hewlett-Packard's hometown of Palo Alto, Calif., while Michael D. Capellas, Compaq's chairman and chief executive, would be president.

Spokesmen for both companies declined to comment last night.

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

For 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 IBM, and far above the $33 billion for Dell Computer Corp., 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 during the period, compared with a profit of $684 million posted for the corresponding 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 not to use that technology and instead go with the technology developed by Hewlett-Packard and Intel.

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 are offering operating systems from Microsoft.

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 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, a major battle looms over which maker of servers is able to gain a dominant position.

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