HP To Buy Compaq In $25 Billion Stock Deal

The two companies, whose shares are hovering near 52-week lows, plan to hold a press conference to discuss specifics of the transaction at 9 a.m. on Tuesday in New York.

For solution providers, the pact creates a flood of channel and product conflict issues. One overriding question is which products and strategies will remain as the two companies come together in a deal that HP claims will result in cost savings of $2.5 billion by mid-2004.

The deal is expected to be finalized in the first half of next year. That means the companies will have to move forward separately with their own products and strategies for as long as 10 months before the transaction receives regulatory and shareholder approval.

The combined company will have what it claims is the No. 1 worldwide revenue positions in servers, PCs, handhelds, imaging and printing.

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Under terms of the deal, HP plans to swap about 0.63 of its shares for each share of Compaq. HP shareowners will own approximately 64 percent of the company and Compaq shareowners will hold 36 percent. Compaq shareholders should get a modest premium of about 19 percent for their stock.

Shares of Compaq ended down 34 cents at $12.35 on Friday, while HP shares fell 19 cents to $23.21.

Carly Fiorina, chairman and CEO of HP, will be chairman and CEO of the new HP. Michael Capellas, chairman and CEO of Compaq, will be president. Capellas and four other members of Compaq's current board of directors will join HP's board after the deal is completed.

In a prepared statement, Fiorina called the deal "a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners."

Both companies have been racing to build a services business to take on $90 billion computer giant IBM, while at the same time courting solution providers with new rules of engagement.

The new HP will have a $15 billion services business with approximately 65,000 employees in consulting, support and outsourcing to be led by Ann Livermore, currently president of HP Services.

The services group is one of four operating units that will be created in the wake of the deal. The others are: a $20 billion imaging and printing franchise to be led by Vyomesh Joshi, currently president of Imaging and Printing Systems for HP; a $29 billion Access Devices business made up of PCs and handhelds to be led by Duane Zitzner, currently president of Computing Systems for HP; and a $23 billion IT infrastructure business, encompassing servers, storage and software to be led by Peter Blackmore, currently executive vice president of Sales and Services for Compaq.

The CFO of the combined entity will be Robert Wayman, CFO of HP. The integration team will be led by Webb McKinney, currently president of HP's Business Customer Organization, and Jeff Clarke, CFO of Compaq.

The merged entity will be headquartered in Palo Alto, although it will retain a significant presence in Houston.

"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," Fiorina said in the statement.

Based on both companies' last four reported fiscal quarters, the new HP would have approximate pro forma assets of $56.4 billion, annual revenues of $87.4 billion and annual operating earnings of $3.9 billion.

"At a particularly challenging time for the IT industry, this combination vaults us into a leadership role with customers and partners -- together we will shape the industry for years to come," said Fiorina in the statement.

The new HP pledged commitment to open systems and architectures. "In sharp contrast to our competitors, we are committed to leading the industry to open, market-unifying architectures and interoperability, which reduce complexity and cost for our customers," said Capellas in a prepared statement. "With this move, we will change the basis of competition in the industry."