Back on Merger Stump

Carly Fiorina pitches HP's buyout of Compaq, despite growing criticism.

A week after the terrorist attacks in New York and Washington, the head of Hewlett-Packard Co. returned to the task of trying to persuade nervous investors, skeptical analysts and doubting users of the merits of her companys proposed purchase of Compaq Computer Corp.

But the challenges facing Chairman and CEO Carly Fiorina—significant as they were when the acquisition was announced Sept. 4—are much more daunting now as the country comes to grips with the devastation wrought by the terrorists and the real possibility of a protracted war.

The value of the merger—originally pinned at $25 billion—dropped during a stock sell-off within two days after the announcement of the acquisition plan to an estimated value of $21 billion. But as the stock markets continued to sag last week, in the first full week of trading since the attacks, the estimated value of the deal had dropped again to $16 billion. The companies also face significant U.S. and European regulatory hurdles.

Furthermore, some system managers are wary not so much of what will happen to HP and Compaq as a result of the acquisition, but rather of what could happen to the industry as a whole should the deal spark a wave of consolidation.

"Im concerned about the loss of competition, which will reduce the number of choices available," said Mark Bizub, IT manager for Kim Lighting Inc., in City of Industry, Calif. "Itll probably come down to Dell [Computer Corp.], the Compaq-HP combination and IBM, and the rest of the players will kind of go away, kind of like what happened in the auto industry."

Many analysts remain unconvinced the HP-Compaq merger is in anyones best interest.

"It looks like to everybody, except those making the decision, that this is a situation where one plus one equals something less than two," said Rob Cihra, an analyst with ABN Amro, in New York. "These are two companies that had a lot of things that they needed to fix, but this gives them even more to fix."

In the last year, profits at both companies have plunged as HP lost ground in the Unix server market to Sun Microsystems Inc. and IBM, and Compaq was toppled as the worlds top PC supplier by Dell.

Even an analyst who supports the deal admits that the challenges are daunting.

"Overall, I dont think its a bad thing. But youve got to be crazy to say it doesnt have some significant question marks around it," said analyst Richard Chu, of SG Cowen Securities Corp., in Boston.

Despite the increasing obstacles, however, theres little chance the companies will abandon the deal, according to some on Wall Street.

"It would be difficult for them to back off now," Cihra said. "Youve thrown a lot of question marks out into the market, and your customers are confused to a certain extent. You cant go back to the way you were."

So far, Fiorina isnt looking back.

"Trust me, this team is determined and motivated to prove the skeptics around this combination wrong," she told attendees at International Data Corp.s European IT Forum in Monaco Sept. 17, in a speech broadcast via satellite from the companys headquarters in Palo Alto, Calif.

She rejected critics portrayal of the merger as a desperate bid by two struggling computer makers to shore up eroding market share.

"This is not a defensive move; its an offensive move," Fiorina told the audience. "We intend to reshape the economic structure of the industry and force our competitors to respond. This combination will do that."