Compaq deal seen more likely after HP results
(Adds closing share prices, paragraphs 6, 11)
By Peter Henderson
SAN FRANCISCO, Nov 14 (Reuters) - Hewlett-Packard Co.
<HWP.N> met its quarterly forecast for the first time in more
than a year with results announced on Wednesday, raising
confidence Chief Executive Carly Fiorina could muster the votes
to pull off a merger with Compaq Computer Corp. <CPQ.N>.
Fourth-quarter net profit fell nearly 90 percent and
Fiorina said she did not count on an economic recovery next
year, but HP's printer sales were relatively strong and both
consumer and business revenues rose from three months earlier.
Tough cost cutting led management to meet its own estimates
for the first time since August 2000, giving Fiorina new
leverage in the high-profile battle over the merger, which pits
the most powerful businesswoman in America against the normally
silent "royal families" of Silicon Valley.
"Despite the actions by some individuals, I think it's way
too early to conclude that this merger will not occur," Fiorina
said, referring to a rebellion against the merger by Hewlett
and Packard family members.
"We remain convinced this merger will occur," she said,
adding HP was talking with and would continue to engage the
Packard foundation, which holds a majority of founding family
shares and which has said it would consider fourth-quarter
results while deciding which way to vote.
Hewlett-Packard stock jumped 9.14 percent, or $1.85, to
$22.08 and was the fourth most active issue on the New York
Stock Exchange for the day. Compaq gained $1.20, or 13.64
percent, to $10.00, and was the most active stock.
Hewlett-Packard earned $361 million, or 19 cents per share,
from continuing operations, down from $841 million, or 41 cents
per share, a year earlier. Sales fell to $10.9 billion in the
quarter from $13.3 billion a year ago.
Wall Street analysts on average had expected earnings of 8
cents per share and sales of $9.9 billion, according to
research firm Thomson Financial/First Call.
"They delivered better-than-expected revenue results and
better-than-expected earnings results so this would tend to
increase shareholder confidence in the management team. So it
is a positive that they got this done this way -- a positive
for the merger," said Buckingham Research analyst Jay Stevens.
"Obviously a stronger stock price is going to make it
easier to deal with some of the questions surrounding the
merger," said Noel DeDora, a portfolio manager at Fremont
Investment Advisors.
The spread between Compaq's share price and the price
implied of the all-stock, $23.7 billion deal, narrowed to
around 40 percent from more than 50, indicating broad, but
diminishing, skepticism the deal would go through. The value on
the deal has risen close to its original $25 billion level.
HP net profit, including charges and one-time items,
dropped to $97 million, or 5 cents per share, from $922
million, or 45 cents per diluted share, in the year-earlier
quarter. The fourth-quarter results included a $282 million
pre-tax restructuring charge.
TWO SURPRISES
"There are really two big surprises in our results. The
revenue line and the expense reductions. We beat expectations
on both fronts. The revenue jump was very much as we predicted,
but others, based upon what was going on around us, pulled
back," Chief Financial Officer Bob Wayman said in a telephone
interview.
"We are very pleased to be able to, through this quarter,
demonstrate that some of the uncertainties that people had
worried about have been, at least for now, addressed."
Fiorina said that the business was beginning to show signs
of seasonality, despite the continuing difficult environment, a
sign of economic normality analysts have been looking for.
Among its main units, HP printing and imaging sales rose 16
percent sequentially but fell 9 percent from a year earlier and
the operating profit margin rose from the previous quarter.
Services showed mixed results with revenue up 2 percent
from the previous quarter, hit by declining consulting revenue,
which HP blamed on the weak economy, and boosted by outsourcing
contracts to run corporations systems rose.
Sales of the top high-end Unix computer, Superdome, were
strong, although lower end server sales dropped.
Long term, HP planned on making an 8-10 percent profit
margin for the larger enterprise systems, compared to a bare 3
percent margin on personal computers, executives said, but HP's
personal computer division continued to lose money, despite
improvement from the previous quarter, Wayman said.
Personal computers are one of the main points of contention
between management and opponents of the Compaq deal, who say HP
does not need a big, low-margin PC business.
PACKARD VOTE
After Hewlett and Packard family members with less than 10
percent of HP stock publicly opposed the merger last week, many
analysts saw merger hopes tied to support from a Packard family
trust with just over 10 percent of shares.
The David and Lucile Packard Foundation has hired
consultant Booz-Allen to evaluate the deal and has said it
would closely monitor the fourth-quarter results.
Fiorina said executives had spoken with and would continue
to speak with the Packard foundation but that a decision seemed
unlikely before December or January.
Hewlett-Packard said it expected fiscal first-quarter
revenues to fall slightly from the fourth quarter.
First-quarter margins and expenses would be flat compared with
the fourth quarter, it said.
"The outlook for the first quarter of fiscal 2002 is
generally in line with our current estimate with the
expectation of a slight decline in sequential revenue due to
normal seasonal factors," Merrill Lynch analyst Tom Kraemer
said in a research note.
(additional reporting by Caroline Humer in New York)
((San Francisco Bureau 415 677-2578,
peter.henderson@reuters.com))
REUTERS
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