HP to buy Compaq for $25 billion
Hewlett-Packard will acquire Compaq Computer in a stock swap worth about $25 billion, creating a technology company second in revenue only to IBM.
The deal, one of the largest in technology history, would merge two of the biggest names in computers, printers and computer servers, and would have total revenue only slightly less than that of IBM, the largest computer company.
Carleton "Carly" Fiorina, the chairman and chief executive of HP, will become the new company's chairman and CEO, while Compaq Chairman and CEO Michael Capellas will become president of the new entity. Capellas and four other Compaq board members will join HP's board.
"This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners," Fiorina said in a statement. "In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial shareowner value through significant cost-structure improvements and access to new growth opportunities."
Capellas added in a statement: "With this move, we will change the basis of competition in the industry."
The deal was approved unanimously by both companies' boards of directors. Compaq shareholders will receive 0.6325 of newly issued HP shares for each share of Compaq. HP shareholders will own 64 percent and Compaq shareholders will own 36 percent of the combined company.
The combined entity will be based in Palo Alto, Calif., HP's hometown, and retain a "significant presence" in Houston, where Compaq is headquartered.
HP said the acquisition is expected to generate "cost synergies" totaling about $2.5 billion annually. The combined company will have operations in more than 160 countries, employ more than 145,000 workers, and have annual revenue of $87.4 billion.
But analysts speculated that layoffs were inevitable. They also suggested that the deal would be closely scrutinized by regulators, including the Justice Department.
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• Hewlett-Packard is acquiring Compaq Computer in a stock swap valued around $25 billion, one of the largest deals in technology history. Compaq shareholders will receive 0.6325 shares of newly issued HP stock for each share of Compaq stock. HP shareholders will own about 64 percent and Compaq shareholders will own 36 percent of the combined companies.The chief financial officer of the combined company will be Robert Wayman, currently the chief financial officer of HP.
The acquisition would dwarf the last big merger between PC companies. In 1998, Compaq bought Digital Equipment for approximately $9.6 billion. Through the acquisition, Compaq hoped to graduate from being a manufacturer of PCs and low-cost servers to a full-service computer provider with high-end hardware, an international services and consulting group, and chip technology.
HP's buyout of Compaq will be fraught with difficulty, according to Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. The two companies are very much alike: Roughly one-third of HP's revenue comes from PCs, notebooks and servers, while about half of Compaq's earnings come from the same sources. Their Unix server businesses are similar.
Layoffs are to be expected, Kumar added. Both companies are being squeezed finanicially in nearly all of their markets.
HP may be buying Compaq for its services business, Kumar speculated. Compaq gets 23 percent of its revenue from services, Kumar pointed out, but the revenue largely comes from basic support and maintenance. The margins for the services business come to only 14 percent.
Another issue that will likely come up is how to integrate the PC divisions. HP outsources 100 percent of its manufacturing. Compaq has been trying to move to a build-to-order manufacturing model for several years.
High-ranking executives from both HP and Compaq earlier this year said that mergers and acquisitions between PC companies were fraught with difficulty and rarely worked.
"It is hard to find a successful example of one PC company buying another," Webb McKinney, vice president of Hewlett-Packard's personal computing group, said in an April interview.
The aversion to acquisitions comes from the nature of PCs themselves. Computers made by one company are generally similar to PCs from another. By purchasing a smaller PC company, a larger company is mostly acquiring only the customer base.
"But are customers loyal? No. The reality is that you can't really buy a customer," McKinney said. "By and large, the consolidation should happen the old-fashioned way: by gaining market share."
Though their backgrounds are vastly different, Fiorina and Capellas have been on similar tracks of late. Capellas and Fiorina were both named as CEOs of their respective companies in July 1999, first Fiorina and, days later, Capellas.
In a vote of confidence, both executives were named to chair their respective companies' boards in September of last year.
Although Capellas and Fiorina have been working independently to revamp their respective companies to get more revenue from services amid slowing hardware sales, the two have collaborated on occasion. In May 2000, Compaq, HP and other companies announced a project to establish an e-commerce parts-procurement effort.
A slumping PC market and price pressure from Dell Computer has spurred talk of consolidation.
In January, Bear Stearns analyst Andrew Neff raised eyebrows when he issued a blunt report calling for massive consolidation. Among his recommendations was that HP should buy Compaq.
Neff also suggested Gateway should sell out to either a Japanese company or to Dell and that IBM should sell its PC business in exchange for more services business.
News.com's Jeff Pelline and Steven Musil contributed to this report.