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Summer fling turns into deal for HP, Compaq

Hewlett-Packard and Compaq's merger started with a chat about cross-licensing an operating system and evolved into a major integration plan--all without a press leak.

NEW YORK--Serious talks about the PC industry's biggest merger in years began with a phone call to Compaq Computer in mid-June about cross-licensing Hewlett-Packard's version of Unix, a heavy-duty operating system.

From that innocuous phone call, HP CEO Carly Fiorina and Compaq CEO Michael Capellas mapped out integration plans with teams from both companies and recruited outside consultants Accenture and McKinsey & Co. for help even before they called their investment bankers. In mid-July, HP and Compaq brought in the investment bankers to work out the financial details of the $25 billion stock swap.

On Tuesday, HP and Compaq spoke about the merger plans, and executives gloated that despite months of discussion, the announcement came off with no press leaks.

"Carly called about us licensing some technology, and I said if we license this, we could also license something else," Capellas said during a conference with press and financial analysts here. "A natural outflow to that was looking at product lines and intellectual property. It just snowballed from there...It just made sense."

Added Fiorina: "We've been watching Compaq for some time and realized we were heading in the same direction with the same vision."

It was a vision partially forced by a slowing economy. Both companies were in the process of reinventing themselves under the pressures of a PC price war, a meltdown in information technology spending at home and abroad, and growth that failed to excite Wall Street. And both had looked to services as a way to boost sales and profit margins while giving customers what they wanted, namely tech products that delivered a quantifiable return on their investment.

The new HP will have the same growth problems the old one had. Once HP and Compaq get regulatory approval sometime in the first half of 2002, the combined company will cut 15,000 jobs and report a revenue decline.

"It is not our intention to lose momentum," Fiorina said. "But it is possible there will be a revenue loss."

Given the choppy IT waters and cautious outlook, Fiorina and Capellas said they worked hard to present investors and customers with a strong integration plan, especially in light of problems with other major IT mergers, such as Compaq's acquisition of Digital Equipment.

The companies didn't have all the answers--they will release details in a proxy filing with the U.S. Securities and Exchange Commission in a few weeks--but they had a lot of them.

"It all looks good on paper, but none of it will matter if you can't integrate effectively," Fiorina said. "We knew we had to come at this clean-eyed and sober. This is a massive integration effort."

Fiorina and Capellas seemed comfortable together at Tuesday's event and rarely had to clarify each other's answers. Fiorina, who will be CEO of the new company, tended to answer big-picture questions. Capellas, who will be president of the new HP, often tackled more specific questions about sales and other operational issues.

"We learned early on that we see eye to eye," Fiorina said.

Fiorina and Capellas met 18 months ago while attending a tech policy meeting in Washington, D.C. A few months later, they began working together on forming an electronics-parts exchange with other PC makers.

About a year ago, Fiorina said, she started paying close attention to Compaq and the similar moves the two companies were making. She added that there was no "Eureka!" moment, but that over time a merger of the two companies just made sense.

Once the two companies decided they would merge, Capellas said, the negotiations came naturally despite some sticky integration issues. The companies' cultures seemed to mesh, and teams from both HP and Compaq had little problem working together, he said.

"The negotiations were never really a strain, despite some tough issues," Capellas said. "It's one thing to think things will fit together and another to see the teams and cultures fit.

"One day, we talked five hours about the organization dynamics," he said. "That's what impressed me."