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Technology Stocks : Hewlett-Packard (HPQ) -- Ignore unavailable to you. Want to Upgrade?

To: PCSS who wrote (521)	5/20/2002 11:13:11 PM
From: PCSS	Read Replies (1) \| Respond to of 4345

PART 2 OF 5 In early September, when she agreed to buy Compaq, the need for such a hard-fought struggle seemed unimaginable. From the company's perspective, the rationale for acquiring Compaq, backed by analysis from consultants McKinsey and investment bankers Goldman Sachs, was impeccable. Ms Fiorina had been hired two years earlier with a mandate for radical change. By the summer of 2001, HP was grappling with a severe economic downturn which served to highlight its weaknesses. Squeezed at the bottom end of the market by Dell Computer, HP was also facing stiff competition from Sun Microsystems in the server market, and remained a weak challenger to IBM in high-end computing and consulting. The acquisition would change that. Together, the two companies would have the scale and breadth to challenge Sun Microsystems and IBM. At the high end, the addition of Compaq's legacy of technologies acquired with Tandem Computer and Digital Equipment would bolster the combined product lines. Meanwhile, Compaq's strength in the Windows NT server sector would complement HP's growing share of the Unix market. Best of all, the combination would boost lucrative services revenues. And while the transition was being managed, HP's crown jewel printing and imaging business, as well as Compaq's profitable storage systems business, would help to underpin the combination, argued Ms Fiorina. This, she claimed, was an industry-shaping acquisition that would transform HP into a computing powerhouse that could provide end-to-end products and services. Yet it quickly became apparent that investors were not impressed by her rhetoric. In spite of a coast-to-coast investor road-show, HP's shares ended that first week down 22 per cent. Ms Fiorina admitted: 'I told the boards the market would hate this deal initially. To be honest, the reaction was a bit more negative than we thought.' One of the biggest problems was that the deal would make HP the world's largest PC company, with a combined market share of more than 19 per cent in terms of unit shipments. However, both companies were under pressure from Dell's superior low-cost business model. The deal would increase HP's exposure to the money-losing PC business, critics charged. In addition, there were doubts about the quality of the services business. Only about 30 per cent would be in the more lucrative professional services segment. The final concern was the difficulty of integrating two such large businesses. On the plus side, HP expected to generate cost synergies of $2.5bn a year and had been unusually conservative in its forecasts, building into its financial model the possibility of losing about 5 per cent of revenues. But critics contended that large technology mergers had a history of failure and that HP had no experience of pulling together such a huge deal.