S&P: COMPAQ OUTLOOK REVISED TO NEG.; DIGITAL EQUIP. ON WATCH
Futures World News - January 26, 1998 17:51
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New York-Jan. 26-FWN--STANDARD & POOR'S (S&P) TODAY revised its outlook on Compaq Computer Corp. to negative from stable, following the announcement that Compaq will acquire Digital Equipment Corp. for $9.6 billion.
S&P affirmed its single-'A'-minus corporate credit rating and bank loan rating, and its 'A-2' commercial paper and short-term corporate credit ratings on Compaq. S&P also placed Digital Equipment Corp.'s ratings on CreditWatch with positive implications (see list below).
The outlook change reflects S&P's concerns about integration issues, despite Compaq's strong financial profile. The ratings reflect Compaq's consistently strong financial performance and financial flexibility, despite the extremely competitive nature of the personal computer (PC) hardware industry.
Houston, Texas-based Compaq is the leading worldwide manufacturer of PCs and PC systems. The acquisition of Digital Equipment (about $13 billion in revenues) will expand Compaq's product line breadth by adding global customer service capabilities, said S&P. The acquisition will be financed with a combination of $4.8 billion in cash and 150 million shares of Compaq common stock. Pro forma combined cash balances in excess of $8.5 billion provide adequate liquidity, even after the potential for cash restructuring costs, which S&P has assumed will likely be required.
Compaq's balance sheet and cash flow characteristics should remain very strong, despite Digital's lower profitability levels. Pro forma combined operating margins (before depreciation and amortization) are about 11%.
OUTLOOK: NEGATIVE
The outlook reflects S&P's concerns about potential acquisition integration issues given the size of the operations being combined, and the potential for management distraction in a very fast-paced industry environment. A sustained decline in profitability and cash flow measures could lead to a downgrade, S&P said. DIGITAL RATINGS PLACED ON CREDITWATCH: Corporate credit rating BB+ Senior debt rating BB+ Preferred stock rating BB- |
