HP, Compaq In A Parallel Universe
Tue Feb 5, 9:30 AM ET
What is it with Hewlett-Packard ? It's down when everyone else is up, and up when everyone else is down.
Yesterday, Chief Executive Carleton "Carly" Fiorina said at a California financial conference that the company sees a recovery in the second half of this year. She said that sales and earnings for the first fiscal quarter will better than expected. Meanwhile, at the World Economic Forum in New York, some of the biggest names in technology-- Microsoft 's Bill Gates and EMC 's Mike Ruettgers, to name two--said they see no recovery until 2003.
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HP says it will "substantially" surpass consensus estimates for earnings of 16 cents per share, that revenue will be up "modestly," and that gross margins have improved. HP, which does its best to convince the world that it is much more than a PC company, attributed the news to growth in consumer PCs and printers. HP shares closed unchanged yesterday at $22.
Coincidentally, Compaq Computer , the company that HP is desperately trying to buy, also raised estimates. In late January, Compaq said to expect fiscal 2002 earnings per share of 32 cents, up from a previous mean consensus of 25 cents per share. Houston-based Compaq attributes the uptick to strength in areas where HP is sorely lacking: storage, servers and, to a lesser extent, security products. Both companies said that execution and cost control are helping results.
It's interesting that the companies are seeing a rebound now. After all, neither had kept up with industry growth rates during tech's boom years. Now, while category leaders don't expect a turnaround this year, HP and Compaq are the anomalies. It's like they're operating in some parallel universe where black is white and night is day.
Speaking of parallel universes, HP shareholders are due to vote on the proposed merger next month. The European Union, which nixed other huge U.S.-based mergers because they would have created too much competition, gave this one the OK last week. While that improves the deal's prospects, it also highlights Europe's second-tier status as global technology innovator and the fact that there is virtually nobody there to compete with.
In any case, the flap over the merger has publicly and rather disgracefully pitted Fiorina against the heirs of HP's beloved founders. But all that mud slinging has thrown an ugly light on the reality that HP and Compaq won't survive independently over the long term. They are both ill equipped to deal with changes in the tech marketplace. Indeed, HP's Web site says that failure to take responsive action to these trends will further weaken both companies.
Neither company appears to have a backup plan if the merger falls apart. And so, five wrenching months after the deal was announced, it might be time to concede that shareholders have to take a chance on Fiorina and merging with Compaq, because the alternative is no better and probably worse.
It's a big gamble. But anyone who bet on the New England Patriots in the Super Bowl knows that miracles do happen. Better yet, sometimes, like in Sunday's game, they not only happen, but they also pay five-to-one odds.
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