Hewlett, Compaq shares fall

Merger is viewed mostly as a joining of 2 struggling firms

Antitrust hurdles seen

September 05, 2001|By Andrew Ratner and Stacey Hirsh | Andrew Ratner and Stacey Hirsh,SUN STAFF

Michael Singleton, browsing in a cavernous Best Buy store on York Road in Lutherville yesterday, contemplated the news that one computer giant planned to buy another - and winced.

"Man, that can't be good," the 20-year-old marketing student at Towson University said upon hearing that Hewlett-Packard Co. yesterday announced plans to buy Compaq Computer Corp. for stock valued at $20.3 billion. "Competition is always good, especially in this industry."

The news that the company known as HP would join forces with Compaq startled the global computer industry, which has struggled through its worst year in the decade-plus that PCs have become a household commodity. But reaction was tepid on Wall Street and among analysts and consumers.

Stocks of both companies dropped on the New York Stock Exchange yesterday. Hewlett-Packard, based in Palo Alto, Calif., closed down $4.21, or 18 percent, at $19 - its biggest drop since 1987. Compaq, based in Houston, closed down $1.27, or 10 percent, at $11.08. HP's stock drop caused the deal to lose $5 billion in value in a day.

"You've got two struggling companies right now; you put both of those together and you've got one larger struggling company," said Jeremy Lopez, a stock analyst for Morningstar Inc. in Chicago.

The proposed acquisition comes at a time when the entire technology sector is gasping and many companies - large and small - are reducing financial forecasts and announcing layoffs.

If the deal goes through, the new company would be among the largest with $87 billion in annual revenue and $3.9 billion in operating earnings. It would retain the HP name - for William Hewlett and David Packard, who created the company in the 1930s in Northern California, where the corporate headquarters would remain.

The combined entity would become the world leader in revenue for servers, access devices such as PCs and hand-held devices, and imaging and printing.

The merger should close in the first half of 2002, pending regulatory approval, the companies said.

Carleton "Carly" S. Fiorina, Hewlett-Packard's chairman, president and chief executive officer, told reporters during a news conference yesterday that the deal would make sense in good times or bad, but especially now because the combined company can be more cost-efficient and create more value for customers.

"This is, in our judgment, a game-changing move," Fiorina said. "This combination changes the game, and we are playing to win."

Fiorina is to retain her top two titles. Compaq's chairman and chief executive, Michael Capellas, would become the new company's president.

But industry observers raised doubts that the merger could pass muster with U.S. and European antitrust officials because Hewlett-Packard and Compaq dominate computer retailing.

Hewlett-Packard is already tops with 17 percent of the U.S. consumer market. Among the rest of the top five, Compaq and Dell Computer Corp. have 12 percent, Gateway Inc. has 11 percent and eMachines Inc. 7 percent, according to International Data Corp., a technology research firm in Framingham, Mass.

In PC shipments overall to consumers and business, Dell, Compaq and HP were the top three in the United States, while Dell, Compaq and IBM Corp. were the top three in the world in the second quarter.

Concern about loss of jobs and innovation were stirred by the news of the massive merger.

Bob Roswell, a computer dealer in Baltimore County, said that when he searched Internet chat rooms yesterday morning, a joke quickly making the rounds was that the new name should be "Hew-Paq," since it could also serve as the instruction for 15,000 employees expected to lose their jobs in the combination. After cutbacks, the new company would employ about 135,000.

"This would not have been anything I would have guessed. I would have guessed someone picking up Gateway or somebody else," said Judy Brown, emerging-technology analyst for the University of Wisconsin system in Madison. Brown wondered whether the acquisition would diminish strengths that Compaq has developed, including its government and academic products and its hand-held devices, which have become a strong rival to Palm Inc.

"I hope HP doesn't do anything to lose that," she said. "This could be a real powerhouse, but any time you take similar companies like this and move them together, somebody loses."

Telecommunications analyst Robert Rosenberg worried about the potential impact on Compaq's development for back-office equipment that helps the telephone industry operate and provide services such as Caller ID.

"Everyone thinks in terms of PCs and desktops, but both companies are very large enterprises," said Rosenberg, president of Insight Research Corp. of Parsippany, N.J. "Compaq has got some fairly unique assets."

IBM, through a spokesman, declined to comment about the deal or whether it would prod IBM back into the consumer computer market, which the company abandoned about two years ago.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.