Buyout leaves the market flat

THE IT industry appears to be unimpressed by Hewlett Packard’s plan to acquire rival Compaq Computer for $25 billion, with many commentators talking down the prospects of a successful merger and the markets hammering both companies’ stocks.

Hewlett Packard issued a statement last week confirming the US PC manufacturer had moved to acquire rival Compaq in a $25 billion scrip deal.

Commentators believe the two companies have been hit harder than most by the PC sales downturn and the merger will bring together two firms lagging in the market.

Hewlett Packard shares took a pounding after the company announced the acquisition plan last week, falling 18 per cent to $36.34. Compaq lost $2.43 to finish trading at $21.34.

Many market commentators believe the size of the merger and the different customer bases make the merger a risky proposition.

Consultancy and research firm Gartner labelled the chances of a successful merger as slim. According to Gartner analyst Andrew Butler, even if Hewlett Packard and Compaq were successful in merging it could mean two years of interruptions, which would only benefit competitors.

The new company will be known as Hewlett-Packard, with HP chief executive officer Carleton Fiorina to become chairman and chief executive officer. Compaq chairman and CEO Michael Capellas will become president.

Ms Fiorina said the acquisition would improve Hewlett Packard’s relation-ships with customers and clients.

“At a particularly challenging time for the IT industry, this combination vaults us into a leadership role with customers and partners,” she said.

Many media reports have focused on the fact that the combined revenues of Hewlett Packard and Compaq will top $87 billion, close to IBM’s earnings of $90 billion.

But although the combined company would be in the position to challenge IBM’s share in the PC and server markets, analysts believe IBM will have ample time to prepare for the emergence of the new rival.

“IBM has 18 months to prepare for the re-organisation of HP,” IDC analyst Graham Penn said.

“They are not going to be sitting around and watching.”

US commentators agree. They believe any momentum or excitement gained from the merger could be lost if Hewlett Packard becomes bogged down in negotiating the finer points of the acquisition.

Hewlett Packard estimates it will generate cost savings of $2.5 million from the merger.

Although neither Hewlett Packard nor Compaq have commented on job cuts, it is almost certain the companies will shed jobs, due to duplication.

Hewlett Packard and Compaq employ 1300 and 2200 staff respectively in Australia. The effect of a global slowdown in PC sales has led to staff cuts and enforced annual leave earlier this year.