HEWLETT-PACKARD buying Compaq for $25 billion in deal that will create technology giant

<br>SAN JOSE, Calif. (AP) _ High-tech giant Hewlett-Packard Co. is buying rival Compaq Computer Corp. for about $25 billion in a blockbuster merger that should shake up the struggling computer industry.

Tuesday, September 4th 2001, 12:00 am

By: News On 6

SAN JOSE, Calif. (AP) _ High-tech giant Hewlett-Packard Co. is buying rival Compaq Computer Corp. for about $25 billion in a blockbuster merger that should shake up the struggling computer industry.

The stock swap announced Monday night unites two companies with a proud history but a difficult recent past. Palo Alto, Calif.-based HP and Houston-based Compaq both have been hurt by technology sector downturns in the past year and each company imposed layoffs to deal with shrinking profits.

The merger creates a behemoth with 145,000 employees and $87 billion in revenue _ about the size of IBM Corp. _ with products not only in the personal computer business but also in computer servers, printers and high-tech services.

Compaq and HP are Nos. 2 and 4 in worldwide PC sales, but their combined total would surpass leader Dell Computer Corp., according to the most recent figures from Gartner Dataquest. Compaq ranks first in worldwide server sales, while HP is fourth.

``This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners,'' said HP's chairwoman and chief executive, Carly Fiorina, who will keep those posts at the merged company.

The deal ``vaults us into a leadership role with customers and partners _ together we will shape the industry for years to come,'' Fiorina said.

The company will still be called Hewlett-Packard and will keep its headquarters in Palo Alto, though it will have a substantial presence in Houston. Compaq's chairman and chief executive, Michael Capellas, will be president.

After the merger closes, which is expected to happen in the first half of 2002, the new HP will be 64 percent owned by HP shareholders and 36 percent owned by Compaq shareholders. Capellas and four other Compaq directors will join HP's board.

``It's an extremely strong match for both firms, particularly at the executive level with Fiorina and Capellas,'' said analyst Rob Enderle of Giga Information Group. ``She's more of the charismatic visionary, he's more of the operations person. The two of them together should be able to take the combined firm places they couldn't go separately.''

HP and Compaq said the deal would save them $2 billion a year by 2003, but Gartner Dataquest research fellow Martin Reynolds said that won't be easy. Both companies, he said, have long product lines that customers will not want to see phased out.

The deal comes as the computer industry suffers through declining sales _ a trend blamed on a saturated market and the slumping worldwide economy. Compaq lost $279 million in the most recent quarter; HP posted a net profit of $111 million in its last quarter, but that marked an 89 percent decline from the previous year.

Compaq's stock closed at $12.35 on the New York Stock Exchange on Friday, down 76 percent from its peak in early 1999. Hewlett-Packard's stock is worth $23.21, down 66 percent from its high last summer.

The companies did not say whether they would be cutting more jobs beyond reductions announced in recent months. Compaq has said it is cutting 8,500 positions, leaving it with about 60,000. Hewlett-Packard is slashing 6,000 jobs, giving it 87,000 positions.

In June, Capellas outlined a broad reorganization plan bringing Compaq's services division into the forefront in the company's work.

Hewlett-Packard has moved in a similar direction under Fiorina, who has brought about a broad reorganization of the 63-year-old Silicon Valley institution since taking over in 1999. She has come under intense criticism in recent months for repeatedly lowering her forecasts for Wall Street, and some analysts have suggested that HP get out of the PC business, which was a money-loser for the company in the last quarter.

Compaq was founded in 1982 by three executives who left Texas Instruments: Rod Canion, Jim Harris and Bill Murto. They sketched their first product _ a portable PC that could run the same software as IBM's new PC _ on a paper placemat in a Houston pie shop before presenting it to venture capitalists.

Hewlett-Packard came out of similarly humble origins _ it was launched in a Palo Alto garage in 1938 by the late William Hewlett and David Packard with $538 of their own money.