Hewlett-Packard and Compaq in $87 billion merger deal

Hewlett-Packard and Compaq in $87 billion merger deal

Hewlett-Packard (HP) and Compaq have announced a merger plan that will change the competitive landscape of the global IT industry and establish the new business as a significant rival to longtime industry leader IBM.

Despite referring to the plan as a merger, under the terms of the deal HP will make a stock-for-stock offer to Compaq shareholders, with HP representing 64% of the new business. This places a value on Compaq of $25 billion. The deal has been unanimously agreed by both companies' boards.

Carly Fiorina, current HP chairman and CEO, will retain the top role in the new organisation, referred to in press materials as 'the new HP'. While five Compaq directors will join the board of the new company, stalwarts of HP retain the top slots in the majority of key executive positions.

The merger is expected to create cost savings of $2.0 billion annually, rising to $2.5 billion, and to result in a significantly improved cost structure for the new business. 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. It would also have operations in more than 160 countries and over 145,000 employees.

The announcement will raise questions for Compaq's customers in financial services. Compaq had earlier acquired both Tandem and Digital Equipment Corporation, each of which had a very substantial customer base within the financial services sector. Having lived through the resolution of the strategic questions arising from merging conflicting product lines, operating systems and architectures, it looks like customers of the new business will experience another similar period of uncertainty.

The new HP claims leadership, judged by worldwide revenues, in servers, access devices (PCs and hand-helds) and imaging and printing, as well as significant revenue positions in IT services, storage and management software.

While HP can now stand eyeball-to-eyeball with key competitor IBM in terms of both the size and the breadth of its offerings, former peers such as Sun Microsystems and also relative newcomer Dell, seem to have been left in the starting blocks in the race for size. While size itself is no guarantee of success, economies of scale are a critical determinant of profitability in the computing industry. Consequently, perhaps the most interesting question raised by the merger is, how will these competitors respond to being placed firmly into the second division of world computing?

The new HP's core businesses include an Access Devices business (adjusted revenues $29 billion) will be led by Duane Zitzner, currently president, Computing Systems, of HP. A $23 billion IT Infrastructure business, encompassing servers, storage and software, will be led by Peter Blackmore, currently executive vice president, Sales and Services, of Compaq, and the Services business with approximately 65,000 employees and $15 billion in revenues will focus on consulting, support and outsourcing and be led by Ann Livermore, currently president, HP Services. The balance is made up of a $20 billion Imaging and Printing business led by Vyomesh Joshi, currently president, Imaging and Printing Systems, of HP.

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