Compaq Computer Still Favors Hewlett-Packard Merger
Dec 12, 2001 (Houston Chronicle - Knight Ridder/Tribune Business News via
COMTEX) -- The word from Compaq Computer Corp. is full speed ahead on the merger
with Hewlett-Packard Co., but the company is sending signals it is ready to go
it alone should the deal fall through.
Chief Executive Officer Michael Capellas told reporters Tuesday at the Internet
World trade show in New York that he "absolutely supports" the proposed $24
billion merger with Hewlett-Packard, despite the thumbs down the deal received
Friday from HP's largest shareholder, the David and Lucile Packard Foundation.
"If anybody is questioning it, let there be no doubt that I am completely behind
it," Capellas said.
But in a memo to employees issued Friday, Capellas raised the possibility that
the company may need to keep slugging it out on its own in a tough tech market.
He noted that the company has made strides toward reaching many of the goals set
six months ago to refocus its business around technical services, enterprise
software and hardware, and new devices.
"That strategy has not changed," Capellas said in the memo. "But regardless of
the circumstances -- whether we are part of the new HP or a stand-alone company
-- I am confident in our ability to achieve these objectives."
Company executives also have been on the road in recent weeks, meeting with
analysts and investors to talk about Compaq's business -- and not the merger.
For example, Mary McDowell, senior vice president for Compaq's bread-and-butter
business, the industry-standard server group, met with Merrill Lynch last week
to talk about software for the company's Intel-based servers. The meeting didn't
do much for the firm's rating of Compaq stock, which remains "neutral," but
Merrill Lynch analyst Steven Fortuna had a few kind words to say in a research
report for Compaq's ability to bring technologies to its servers.
Mark Lewis, vice president and general manager for Compaq's storage group, met
with UBS Warburg last week, which led to analyst Don Young noting that Compaq
has a better business model than storage industry giant EMC, as well as some
advantages in cost and technology over Dell Computer Corp.
And briefings with analysts at Lehman Brothers and Goldman Sachs led to a few
more positive comments, including comments that Compaq saw better-than-expected
sales in October and November, particularly in Europe. Lehman raised its price
target to the company's stock to $13 from $10, while Goldman Sachs raised its
fourth-quarter revenue estimates slightly from $7.6 billion to $7.8 billion.
Even Executive Vice President Mike Winkler and board member Thomas Perkins also
have been made available to some media, where they've talked about good morale
at the company despite the uncertainty of the merger.
While the analyst meetings very likely may be part of regularly scheduled
briefings, any effort to paint a picture of a healthy, independent Compaq
couldn't hurt right now, said Terry Shannon, a long-time computer industry
observer and author of a Compaq users newsletter.
"When Compaq agreed to be acquired, it was an overt admission that it had issues
it couldn't fix itself, so it will be perceived as weakened if the merger
fails," said Shannon. "But it's not a death knell by any means."
Much of Compaq's technology, including its most powerful computers such as the
Alpha, Himalaya and Proliant line of servers, were expected to survive the HP
merger, so they will continue to be well received by customers if the merger
does not happen.
And while Compaq's version of Unix -- the powerful and stable programming
language that runs many large, mission critical systems -- was expected to be
put aside in favor of HP's version, many consider it superior to HP's version,
he said.
"They're very well positioned in a lot of their markets, but they've got to get
their marketing and communications ducks in a row if they want to do a better
job fighting on their own," Shannon said.
The company is also in relatively good shape financially, with about $3.9
billion in cash, and could get another $675 million in cash from HP should the
company's board of directors cancel the deal prematurely.
Compaq also has successfully cut hundreds of millions in excess inventory and
other costs in the past year. Job cuts that started in the spring amounted to
about 7,800 worldwide by the beginning of December, with more than 2,000 jobs
cut in Houston so far.
And Compaq hasn't stopped competing fiercely for sales since the merger was
announced. An internal Compaq memo issued in October outlined ways for
salespeople to counter alleged uses of "fear, uncertainty and disinformation" by
HP's sales force when bidding for work against Compaq.
Some analysts aren't so sure about Compaq's prospects, however, or management's
conviction about its own well-being. Some noted that before Friday's Packard
Foundation vote, the company was willing to sell out when the company's shares
were trading at a 52-week low.
U.S. Bancorp Piper Jaffray analyst Ashok Kumar said that Compaq's prospects as
an independent company are dubious. He said Compaq will have trouble convincing
customers about its enterprise product plans without the HP merger and will face
increasing price competition from Dell.
Being acquired by a company other than HP is also somewhat unlikely. Shannon
said the cultural and personal differences between Compaq and Sun Microsystems
make that a questionable match, while Dell has no need to buy any of the
businesses Compaq currently has.
Partnering with IBM, a combination many say has been considered informally by
both before, could make sense on the technology side, Shannon said. Compaq's
data storage business, combined with its most powerful server systems, would
give IBM a lock on a large segment of the business computing business, he said.
With or without a suitor, however, Compaq will have to make some huge changes to
its business, particularly lessening its dependence on the viciously competitive
personal computer business, Kumar said.
That likely would mean more job cuts, selling off some of the company's
factories and ending relationships with retailers.
While the company has said repeatedly it plans to keep selling PCs to consumers,
Lehman Brothers analyst Dan Niles recently noted that the company may be looking
to move all of its U.S. desktop computer sales to a direct model, meaning all
online without retailers.
If the company did so, it would find itself in good company. IBM did the same in
1999.
"If I were an employee at Compaq that dealt with consumer PCs, I'd be a bit
worried right now," Shannon said.
Reuters News Service contributed to this story.
By Tom Fowler
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