HP Shoots for Top IT Spot with $25 Billion Compaq Bid

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Under pressure from falling world sales of PCs and pressures on IT profit margins, Hewlett-Packard (HP) has agreed to acquire PC manufacturer Compaq for $25 billion to create what will become the world's largest information technology (IT) company.

The transaction, which will be accounted for as a purchase, will give HP shareholders roughly 64% of the equity and Compaq shareholders 36%. Carly Fiorina, chairman and CEO of HP will continue in the same role in the new HP. Compaq CEO Michael Capellas will become president.

With 145,000 employees worldwide, HP is predicting the new organization will gain around $2.5 billion in annual cost savings. Based on the results reported by the companies over the past four quarters, the new HP would achieve $3.9 billion in profits on an annual revenue of $87.4 billion. The joint assets are estimated at $56.4 billion.

According to HP's official announcement, the combined company will be the top worldwide revenue earner in the server, PCs and hand-held device, and imaging and printing markets.

The company will also be a big player in IT services, storage, and management software. The acquisition of Compaq may compensate HP for its disappointment earlier this year when its falling share price undermined a proposed deal to buy the consultancy wing of PricewaterhouseCoopers.

The HP-Compaq combination has already set anti-trust alarm bells ringing. While rivals Gateway and Dell have captured a large portion of the corporate market for PCs by selling directly to their customers, HP and Compaq are the main suppliers to the retail PC market.

Siliconvalley.com columnist Mike Langberg looked through his Sunday paper and found that the two companies sold 76% of the PCs advertised in its pages. "There is no amount of public-relations spin that will overcome my gut-level reaction here: Such an extreme level of market concentration can't be good for PC buyers," he commented.

HP is one of the technology industry's aristocrats. Engineers Bill Hewlett and David Packard set up the company in a Palo Alto garage; its formal incorporation 1939 is commonly cited as the birth date of the Silicon Valley phenomenon.

Before the advent of upstarts like Dell and Gateway, Compaq typified the 1980s PC boom, billing itself as the fastest growing company in U.S. history. When the PC market showed signs of stagnating in the late 1990s, Compaq expanded its reach by acquiring Unix server manufacturer Tandem and Digital Equipment Corporation (DEC), formerly one of the industry's top players alongside IBM and HP.

"In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial shareowner value through significant cost structure improvements and access to new growth opportunities. At a particularly challenging time for the IT industry, this combination vaults us into a leadership role with customers and partners - together we will shape the industry for years to come."

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