Compaq Raises Earnings Forecast

Chief Executive Michael Capellas told reporters that shareholders, including Putnam Investments, are lining up to support the merger. Putnam owns a 1.74 percent stake in HP and is Compaq's largest shareholder with a 4.8 percent holding.

In addition, Capellas said he expects European regulators to give their filing on the $24 billion merger the green light without going into an extensive fourth-month review and in time for the shareholder vote, which he expects to happen in March.

"Naturally we believe we played a winning hand. It would be illogical to think we weren't confident," Capellas said.

+Capellas earlier in the day told financial analysts at a meeting in New York that an economic recovery is set for the second half of the year and that Compaq's personal computer business, which last year lost the No. 1 slot to Dell Computer , was set for a return to profits.

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"The fundamentals for a second-half recovery are in place," Capellas said.

+PCs, which dragged on Compaq's earnings in 2001 as the business drifted into the red, eventually will return to a long-term growth rate of 5 percent, he said. "I believe this is an unbelievably strategic business," Capellas said.

Analysts, however, questioned the value of Compaq's new forecasts, given that they were based on the strength of the latter part of the year -- after the planned $24 billion Hewlett-Packard merger is voted through or called off.

"It's hard to assess how relevant this guidance is. If the merger happens, we'll never know. If it doesn't, they may reassess the outlook," said Andrew Neff of Bear Stearns.

Compaq said it would earn 32 cents per share for the year on a 1 percent rise in sales to $34 billion. That compared with Wall Street's consensus estimate of 25 cents earnings on revenues of $32.6 billion.

Compaq in 2001 earned $256 million, or 15 cents per diluted share, excluding restructuring charges and other one-time items, on sales of $33.6 billion. Including the charges, Compaq reported a loss of $785 million, or 47 cents per share.

EXECUTIVES OPTIMISTIC

"There is upside to this guidance," Chief Financial Officer Jeff Clarke told the analysts, saying that the economy and Compaq's management could drive further improvements.

The company's shares hit $12.30 midday on the New York Stock Exchange, their highest intra-day level since Sept. 4, but they later fell to close at $11.95, down 10 cents.

Compaq cited expected demand for data storage by corporations, demand for server computers based on Intel microchips and increased demand for security products and managed services as driving the change in guidance.

Clarke said that a rise to $34.5 billion in sales would bring earnings of 40 cents per share and $35 billion would bring earnings of 48 cents.

The raised guidance comes amid criticism from heirs of HP's founders for the merger. Walter Hewlett, and most recently David Packard, recently have launched ad campaigns that question the merits of the deal. The families, with an 18 percent stake, intend to vote against the merger.

Investors and analysts have also criticized the deal, saying that integrating the two large technology companies will be too difficult and that the commodity PC business will weigh down HP's profitable printing operations.

But Capellas says that as vote draws near, momentum for the deal is building and that he's confident shareholders, including Putnam, will vote for it. HP has also trotted out support recently, saying that Alliance Capital, with a 1.1 percent stake, would vote "yes".

A Putnam spokesman said the mutual fund's policy is to not comment on how it intends to vote. Alliance Capital was not immediately available.

Capellas said he will meet Jan. 29 with Institutional Shareholder Services, a proxy firm that advises large institutional shareholders how to vote. That follows HP Chief Excutive Carly Fiorina's meeting with the group Jan. 24.

Capellas said ISS wants to see if the corporate governance is clean, if the strategic foundation is sound and if the economics work.

"What are the elements on which ISS makes a decision and have we adequately addressed them? And when I go through them, I think we're in good shape," Capellas said.

Andrew Whittaker, head of arbitrage research at Lehman Brothers, said he's feeling a bit more confident that the merger may go through.

"We're feeling a little bit better about it," he said. "Their operational advantage shows that they can execute and gives investors confidence the companies can combine and attain the synergies."

Compaq Executive Vice President Michael Winkler said Compaq's personal computer division to profit by the third quarter.

"We no longer apologize for this PC business," he said. "We want to achieve profitability in the third quarter. I'd like to do it faster and, if the market cooperates in terms of the turnaround, we can do it faster," he said.

+REUTERS

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