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To: Box-By-The-Riviera™ who wrote (119329)	9/3/2001 10:47:58 PM
From: Jo_Bidou	Read Replies (2) \| Respond to of 436258

By NIKHIL DEOGUN, GARY McWILLIAMS and MOLLY WILLIAMS Of THE WALL STREET JOURNAL NEW YORK (Dow Jones)The cutthroat computer price war may soon get tougher. In a deal that would jolt the sputtering computer industry, HewlettPackard Co. (HWP) has agreed to acquire Compaq Computer Corp. (CPQ) in a stockswap transaction that values Compaq at about $26 billion, people familiar with the matter say, The Wall Street Journal has learned. Both boards have approved the transaction, and an announcement is expected today. The deal would result in a combination of two of the biggest names in computers, printers and computer servers. (This story and related material will be available on the Journal's Web site, WSJ.com.) At its most basic, the deal would bring Compaq, the world's No. 2 maker of personal computers, under the umbrella of HP, a distant No. 3, allowing the combined entity to be bigger than and better able to compete with leader Dell Computer Corp. (DELL). But the deal would also have implications beyond the PC industry, which is witnessing one of its worst downturns in years. It threatens to bring the PC price war to the world of computer services and storage networks. Under terms of the deal, HewlettPackard would swap about 0.63 of its shares for each share of Compaq. At 4 p.m Friday in New York Stock Exchange composite trading, shares of HewlettPackard were down 19 cents at $23.21, while Compaq's stock was off 34 cents at $12.35. Both stocks hit 52week lows on Friday, and Compaq shareholders would get only a modest premium of roughly 19% for their stock. HP Chief Executive Carleton "Carly" Fiorina, 46 years old, would continue to be CEO of the combined company, according to people familiar with the matter. Michael D. Capellas, Compaq's 46yearold chief executive, would serve as president. Five representatives of Compaq are expected to join HewlettPackard's board. A spokeswoman for HewlettPackard declined to comment. A spokesman for Compaq couldn't be reached for comment. Increasingly, the personal computer companiessqueezed in their core lowmargin businessare trying to move onto the turf occupied by International Business Machines Corp. (IBM) and Sun Microsystems Inc. (SUNW) by focusing on highermargin computer services work, such as helping companies set up and maintain their computer networks. The combination would create a computer services giant. Both companies have been trying unsuccessfully to reach critical mass in their services operations for the last several years. Amid relentless pricecutting in their computer operations, each has turned to acquisitions with varying degrees of success. For instance, HP recently agreed to acquire Comdisco Corp.'s (CDO) disasterrecovery operations but saw its talks to buy the consultingservices business of PricewaterhouseCoopers LLC (X.PWC) fall apart last year. Compaq, which entered the services business with a splash when it acquired Digital Equipment Corp. in 1998, has made several small services buys since then but was outbid in its pursuit of Proxicom Inc. (PROX) Beyond their similar product lines, both HP and Compaq have struggled to find a workable strategy after losing share in the computer markets that early on made each company successful. But with their stocks near lows, neither has the wherewithal to match IBM or the specialist services companies such as Electronic Data Systems Corp. (EDS) In many ways, executives may have felt they had no alternative but to combine forces. The two companies expect $2.5 billion in annual cost savings within a few years. Both Compaq and HP are facing enormous profit pressures but have been reluctant to get out of the PC game entirely since that would be an admission of defeat. On paper, the deal would create the world's largest supplier of PCs and server computers. The combined company would hold a 19% share of the global PC business, leapfrogging current leader Dell Computer Corp., which has about a 13% worldwide share. The deal is expected to immediately add to HP's earnings in large part because of the cost savings. What's more, the new company would hold 37% of the market for powerful server computers that run corporate computer rooms, a market which Compaq currently leads. That share would be more than double the current No. 2, Dell. Both HP and Compaq have struggled to halt the inroads of Dell Computer in PC servers and of IBM in sales of largecomputers running the Unix operating system. In the quarter ended June 30, Compaq's share of U.S. server shipments fell 26% and HP's share fell 25%, while Dell and IBM were the sole bigcompany gainers, according to Gartner Inc., a Stamford, Conn., market research firm. The combined companies' market strength would likely provoke antitrust scrutiny. In PCs, for instance, the two control twothirds of U.S. retailstore sales in the wake of the departures of IBM, Packard Bell Electronics (X.PBE) and Acer America.(P.ACI) Compaq also has been one of the largest customers of Lexmark International Inc. (LXK), an HP printer rival. Even if the government does not block the deal outright, its investigation could take many months to complete and require divestitures of overlapping product lines. Justice Department officials could not be reached for comment last night. (MORE) DOW JONES NEWS 090301