SEPTEMBER 4--Hewlett-Packard has announced that it is acquiring Compaq Computer for $25 billion in stock in a move to grow as the computer industry struggles with shrinking sales. The merger, if completed, would produce a company with total revenue only slightly less than that of IBM, the largest computer company. But both Hewlett-Packard and Compaq have recently seen revenue slide and profit plunge because of an industry slowdown, and both have announced job cuts.
The merger of the two computer giants could create a stronger competitor for Sun Microsystems and IBM in the server computer market while putting pressure on IBM, Dell, and Gateway in the personal-computer business. Hewlett-Packard and Compaq said the merged company would be in a position to compete with IBM across virtually its entire product line.
Carleton S. Fiorina, who became chief executive of Hewlett-Packard in 1999 when she was hired away from Lucent Technologies, said, "Clearly the potential of this combination is compelling, but we understand the magnitude of the challenge and the need for discipline and speed."
Late last year, Hewlett-Packard tried to expand its services business by acquiring the consulting operations of PricewaterhouseCoopers, the accounting firm. But that plan fell apart as Hewlett's stock price declined. Compaq, however, has been growing its services business.
Under the deal, one Compaq share will be exchanged for 0.6325 Hewlett-Packard share, providing a premium of around 18%. Compaq closed on Friday at $12.35, down $0.34, while Hewlett-Packard shares fell $0.19, to $23.21.
Compaq, which is based in Houston, TX, began in 1982 as a maker of personal computers. It has stumbled recently amid severe price wars in personal computers. Its late 1990s acquisitions of Digital Equipment, itself once the second-largest computer maker, and of Tandem Computers, a mainframe computer maker, have not been viewed as great successes.
Combined, the company will have about 145,000 employees, after layoffs announced earlier this year are completed. Further reductions seem likely, as the companies said that they expected annual cost savings of $2.5 billion by the middle of their fiscal year in 2004.
The proposed combination could raise antitrust concerns. Any inquiry by the US Department of Justice could take months to complete. The companies expect the deal to be completed by the first half of next year.