Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Compaq -- Ignore unavailable to you. Want to Upgrade?

To: Piotr Koziol who wrote (93630)	11/7/2001 4:10:14 PM
From: Elwood P. Dowd	Read Replies (3) \| Respond to of 97611

CPQ/HWP, Unhinged?? by: skeptically 11/07/01 02:35 pm Msg: 260467 of 260491 As Spread On HP-Compaq Merger Widens, Stks Look Unhinged 11/07 2:24 PM (DJ)Story 7307 (CPQ, GE, HON, HWP) By Marcelo Prince Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The spread on the planned merger between Hewlett-Packard Co. (HWP) and Compaq Computer Corp. (CPQ) continued to widen Wednesday amid mounting fears the deal will unravel, leading some traders to speculate that the two stocks are becoming unhinged. The spread - or difference between H-P's offer and Compaq's share price - is about $4.50, representing a 35% discount. The discount is usually about 5% in transactions that investors expect to close. The spread nearly doubled on Tuesday to about 30% after the family of H-P's late founder William Hewlett said they opposed the merger and would vote their 5% stake against the deal. The news came as surprise to investors and takeover traders who have scrambled to unwind bets they had made on the deal. Arbitrageurs typically bet on pending mergers by selling short shares of the acquirer and buying shares of the target. They profit as the deal is closed and the gap between those positions narrows. But in this situation it has widened forcing them to sell Compaq and purchase H-P shares to stem losses. H-P and Compaq shares are starting to become unhinged because so many arbs have unwound their positions and expectations that the deal will be completed are so low, said one New York trader. "The likelihood of a deal is now under 20%, so it's as though you are buying two independent companies," said this trader, who unwound his firm's arbitrage position at a loss on Tuesday. Take over traders said Wednesday that they don't expect the spread to widen much further because Compaq shares are nearly washed out and H-P shares are getting pricey. "We've seen the bulk of the knee-jerk (reaction)," said another arbitrage trader. Indeed, the spread has narrowed slightly from earlier this morning when it approached $5.00. Some opportunists see the disparity between Compaq's price, $8.09, and the take out price, $12.30, as a handsome reward with limited risk. Dan Niles, the computer analyst at Lehman Brothers, told clients Wednesday the best way to play the deal was to buy Compaq. He sees downside risk in Compaq at book value, or $6.63 a share, and upside to $14. But many arbitrageurs, especially those caught off guard Tuesday, are hesitant to gamble too much capital in such an uncertain situation, traders said. Many have suffered steep losses this year from failed mergers, including General-Electric's (GE) $44 -billion acquisition of Honeywell International (HON) which was blocked by European regulators. Niles' advice notwithstanding, much of Wednesday's widening spread resulted from continued weakness in Compaq shares. The stock was recently down 5% to $8.09, while H-P slipped 2% to $19.46. Investors and analysts say Compaq, which reported a $499 -million third quarter loss as sales fell 33% to $7.48 billion, will struggle as a stand-alone entity if the deal falters. Both H-P and Compaq executives say they remain committed to completing the deal. But the Hewlett family's move was a psychological setback for the deal and some investors are concerned the family of late founder David Packard, which controls about 10% of H-P, will also oppose the deal. Packard's son, David Packard, said he opposes the deal. But his sister, Susan Orr, and the family's foundation won't make a decision on the deal until a board meeting in early December. The HP-Compaq combination has encountered skepticism from investors since it was announced on Sept. 3. H-P is offering 0.6325 of its shares for each share of Compaq. The deal, initially worth $25 billion, is now valued at $20.9 billion. -By Marcelo Prince, Dow Jones Newswires; 201 -938 -5244 (END) DOW JONES NEWS 11 -07 -01 02:24 PM