Market frowns on Hewlett-Packard/Compaq deal

Two of the world's largest computer companies announce they will join forces, with Hewlett-Packard buying Compaq

Investors were holding back their applause Tuesday, after two of the world's biggest computer companies announced plans to join forces.

Hewlett-Packard Co. said it will buy Compaq Computer Corp. in a stock swap deal that lost $5 billion US of its value in the space of a few hours because of negative market reaction.

The stock swap will see one Compaq share being exchanged for about 0.63 shares in HP, providing Compaq shareholders a theoretical premium of about 18 per cent. But many shareholders weren't waiting around for the promised premium.

Compaq shares fell $1.27 US Tuesday to close at $11.08 US.

HP's stock dropped from the opening and kept on falling. Hewlett-Packard shares fell $4.34 US to close at $18.87 US a 4-year low.

The decline in the share prices cut the effective value of the deal from $25 billion US to $20 billion US.

Some analysts were skeptical about whether the merger was a good idea. some said it might give HP's rivals time to increase their market share during the integration. Dell Computer shares, for instance, rose 93 cents US to $22.31 US.

HP shareholders will own about 64 per cent of the new company, with Compaq shareholders holding 36 per cent.

The new company will on paper at least rival technology leader IBM. In the last 12 months, HP reported $47 billion US in revenues and Compaq had revenues of $40 billion US. IBM's revenues were a bit higher at $90 billion US.

The combined PC sales of the two companies would make the new company a world leader. Compaq already ranks first in computer server sales.

After the purchase, the new company will employ 145,000 people in more than 160 countries.

HP has about 1,800 employees in Canada, most of them at its Canadian head office located in Mississauga, Ont.

Compaq Canada Corp. is the fourth largest of Compaq's 34 international subsidiaries, with 3,100 employees.

The company has headquarters in Richmond Hill, Ont.

Both HP and Compaq have suffered sagging profits and massive job cuts during the recent downturn as technology sector sales have shrivelled.

Compaq recently cut 8,500 positions, while HP reduced its workforce by 6,000.

During a Tuesday morning conference call, the merger partners said more cuts were coming. The initial estimate was that the combined company to be known as Hewlett-Packard would shed at least 14,000 jobs.

Hewlett-Packard chief financial officer Bob Wayman said earnings would get a 20 per cent boost by 2003.

The merged company would be based in Hewlett-Packard's home town of Palo Alto, Calif.