Mark Your Calendars: New H-P Has Big Milestones To Reach
By: Peter Loftus, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- The clock has begun ticking for Hewlett-Packard Co . ( HWP) now that it's won its fight to acquire Compaq Computer (NYSE: CPQ - com/n/c/cpq.html">news) Corp. (CPQ).
Once the $18 billion computer merger is completed, which is slated for May 7 , H-P will be under heavy pressure to meet the ambitious goals that Chief Executive Carly Fiorina trumpeted to sell the merger.
For instance, H-P has a year to boost earnings by 13% to fulfill one its key promises. Another goal is annual cost savings of $2.5 billion by mid-2004. To achieve that, H-P has promised to cut about 15,000 jobs from the combined entity's work force.
But the feasibility of some of these goals already has been called into question by Walter Hewlett, the dissident H-P shareholder whose campaign to block the merger ended Tuesday. Hewlett's unsuccessful lawsuit against the companies unearthed documents that showed that some executives were doubtful the post-merger H-P could meet the targets.
In testimony in last week's trial in Wilmington , Del., Fiorina stood by the original goals. And the state judge who ruled in favor of H-P said her testimony was credible.
But the test will be in the months and years ahead, when shareholders will be sure to hold Fiorina to the targets. Broken promises have left a sour taste in the mouths of many investors, particularly after big-menu mergers. Just ask shareholders in AOL Time Warner Inc. (TWX - news) (AOL), which fell short of its ambitious financial targets less than a year after the January 2001 merger of America Online and Time Warner.
Here's a breakdown of the bigger promises made by H-P and Compaq, with deadlines if applicable:
- A 13% increase in earnings-per-share during the first year of the merger. If the merger closes as planned, the deadline for this goal would be May 7, 2003 .
It's a tall order, given the companies' mixed earnings track records. In the year ended Oct. 31 , H-P reported pro forma earnings of 89 cents a share, excluding various items, down from $1.74 in fiscal 2000. And Compaq had a pro forma loss of 34 cents a share in 2001, reversing earnings of 34 cents a share in 2000.
According to Walter Hewlett's legal team, Compaq Chief Financial Officer Jeff Clarke expressed doubt over the combined entity's ability to meet the earnings target. In fact, Hewlett's lawyer argued, Clarke said the merger would reduce H- P's earnings by 10%. Fiorina stood by the financial targets she had given investors.
And don't forget the accounting charges. H-P said in its proxy statement the deal "will result in charges to earnings that could have a material adverse effect on the market value of" H-P shares.
- Annual pretax cost savings of $2.5 billion. H-P said the combined entity will achieve this goal by mid-2004. That's a lot of money, but it represents only about 3% of the companies' combined pro forma expenses of $80.57 billion in the year ended Oct. 31 .
The biggest source of the cuts will be in administrative and information- technology costs, as the companies consolidate internal computer systems and payroll departments. H-P said it can achieve $625 million in annual savings in these areas. The company also sees "efficiencies" totaling $425 million in research and development efforts.
H-P probably won't achieve its cost-savings goal, said Roy Papp, president of Papp Mutual Funds, which voted its H-P shares in favor of the merger. But it won't matter so much because H-P will benefit from a recovery in the technology sector, Papp asserted, which will offset any savings shortfall.
"I think the growth of the industry is going to be fast enough so they won't have to cut costs as much as they expect," Papp said.
The costs cuts will have a human cost, which points to another big H-P goal:
- The elimination of 15,000 jobs. H-P said soon after the merger was announced last September it would cut the companies' combined work force to 135,000 from 150,000. The cuts will come over two years, H-P spokeswoman Rebecca Robboy said Wednesday. Last week in court, Fiorina said the job cuts might instead be 13, 000.
Hewlett has argued that H-P will have to cut 24,000 jobs, and that H-P hid this fact from investors. H-P denied the claim.
Whatever the final number is, massive layoffs could be disruptive and costly for H-P.
"Whenever a big part of the deal is dealing with people and taking people out, the track record there isn't great," said Sydney Finkelstein, a business professor at's Tuck School of Business in Hanover, N.H. " Layoffs sound easy. But so many companies have laid off people after a merger, only to hire them back, and often at consultant wages."
Finkelstein said it's often difficult to figure out which employees should be let go in the first place. Too often, political considerations outweigh the merits of individual employees, he said.
- Add $5 to $9 to the price of H-P shares. The stock recently traded at $ 16.78, down 32 cents for the day. If H-P met this goal, the stock would rise to between $21 and $25 or so, representing increases of 30% to 54%.
But when H-P and Compaq agreed to the merger, H-P shares were trading around $23. It's not clear whether the share price goal applies to the pre-merger stock price or the current price. Based on pre-merger levels, H-P's goal would boost the stock to between $28 and $32.
David Katz, president of Matrix Asset Advisors, which voted its H-P shares against the merger, sees H-P shares rising to between $28 and $30 within 12 to 18 months. One reason he opposed the merger was that he believed the stock of a stand-alone H-P would reach $40.
In any case, the stock price goal could be tough amid a broader market slump. In the year before the merger was announced, H-P and Compaq shares each tumbled by more than 60%. H-P shares have fallen an additional 30% since then, while Compaq shares have dropped an additional 17%.
- Revenue losses of $4.1 billion, or 4.9% of estimated 2003 revenues. This will result from the companies' overlapping businesses. It's also another target disputed by Hewlett. He argued the revenue loss will be greater, partly because customers will defect to other computer makers. Fiorina stood by the target.
"We're hopeful they know more than we know," Katz said of H-P's revenue loss target. "Our sense is that tech spending is going to pick up so that might give them some cushion."
- Lucky charities. This is a drop in bucket compared with the value of the merger, but Compaq said it plans to make charitable contributions totaling $6 million in the names of its current outside directors. These contributions normally would have been made upon each director's death.
"It's very customary for a company to make some kind of memorial or contribution in the name of its former directors upon their death," said Compaq spokesman Arch Currid. The company decided, "given the merger, they would go ahead and just do it now."
Currid said he didn't know which charities would receive the contributions. The donations will be made soon after the merger closes.
-Peter Loftus; Dow Jones Newswires; 201-938-5267; peter.loftus@dowjones.com
(This story was originally published by Dow Jones Newswires)
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