Walter Hewlett: The Consequences of the HP-Compaq Merger

The following is a summary of what we believe to be the consequences of the proposed merger with Compaq:

• Hewlett-Packard's Business Portfolio Will Be Worse. The proposed merger would dilute Hewlett-Packard stockholders' interest in the profitable imaging and printing business by over one-third, and increase the percentage of revenues derived from a currently unprofitable PC business from 20% to 31%. The combined company would be weaker, not stronger, than Hewlett-Packard.
• Hewlett-Packard's Strategic Position Will Not Materially Improve. The proposed merger would: (i) dramatically increase Hewlett-Packard's market position in unattractive low-end, commodity businesses, such as PCs and low-end servers; (ii) not materially improve Hewlett-Packard's market position in mid-range and high-end servers and high-end services, which have higher profit margins than the profit margins for PCs; (iii) divert management's attention and financial resources from Hewlett-Packard's preeminent imaging and printing business; and (iv) do little to increase Hewlett-Packard's consulting and outsourcing capabilities.
• The Integration Risk Of The Proposed Merger Is Substantial. No significant combination involving a computer company has ever met expectations. The odds are against success in this merger. The complexity of putting two companies together, in a difficult economy, when each company is currently undergoing its own transition, presents daunting challenges and unacceptable risks. Management has no experience or track record with a merger of this scale. Even if the targeted cost synergies are achieved, it is likely that merger-related revenue losses will offset or exceed them.
• The Financial Impact On Hewlett-Packard Stockholders Has Been And Will Be Negative. From the date the proposed merger was announced through February 4, 2002, Hewlett-Packard stockholders have lost $7.0 billion relative to an index of comparable companies. The market has twice made resoundingly clear that this combination destroys value for Hewlett-Packard stockholders - once when Hewlett-Packard's stock price dramatically declined after the proposed merger was announced and again when Hewlett-Packard's stock price dramatically increased after we made our opposition to the proposed merger public. In addition, the dramatic reduction in the earnings outlook for Compaq since the announcement of the proposed merger means that Hewlett-Packard stockholders are getting too little of the combined company relative to Hewlett-Packard's contribution to earnings. It also transforms what Hewlett-Packard's management claims to be an accretive transaction into a dilutive transaction when revenue losses more in line with historical experience in prior transactions and analysts' estimates (up to 17% in 2003) are factored in. Further, when compared to a standalone Hewlett-Packard, the combined company represents a weaker credit with greater equity risk and a higher cost of capital.