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All eyes on HP's merger progress

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CIOL Bureau
New Update

By Peter Henderson



SAN FRANCISCO: Hewlett-Packard Co. reports earnings on Tuesday for its first quarter as the world's No. 2 computer company following its merger with Compaq Computer Corp., focusing Wall Street's attention on how HP has integrated Compaq's operations, more so than the numbers.



Company watchers will focus on whether the May merger that nearly doubled HP's size has caused problems for HP as it copes with the weak economy and slack spending on computer products. "The key is, have the wheels fallen off as a result of this deal?" said David Katz, chief investment officer at Matrix Asset Advisors.



To hear one HP official tell it, operations are on track. "The story as I see it from the first hundred or so days of the merger is we are hitting all our milestones," Jim Milton, managing director, Americas, told Reuters. He pointed to a multimillion deal, made after the merger, to supply about 5,000 personal computers and some servers as well to movie theater firm Regal CineMedia Corp.



HP has predicted $125 million of cost savings in the July-ending fiscal third-quarter, and another $375 million in the fourth, and it plans to cut 10,000 jobs by Oct. 31. Financial analysts want to see whether cost-cutting measures are showing the results that HP executives predicted. For one, Bear Stearns analyst Andrew Neff is concerned merger cost savings will not materialize.



"We have seen many instances where companies merged and looked 'cheap on the numbers' but the numbers never came through," he wrote in a research note. Merger economics are central to HP support on Wall Street.



"The investment thesis for HP is predicated on earnings power in fiscal 2003 and fiscal 2004, when the benefits of the merger should begin to meaningfully shape financials," Sanford Bernstein analyst Toni Sacconaghi wrote.



Recovery, printers two keys



Chief Executive Carly Fiorina told analysts on June 4 that merger integration was ahead of plan but technology spending would not recover even modestly this year. The rolled out an HP model for 4 percent to 6 percent revenue growth in fiscal 2003 and 7 percent to 9 percent in fiscal 2004.



The current Wall Street third-quarter revenue consensus, $16.82 billion, represents a 7.4 percent drop from the second quarter, if HP and Compaq pre-merger sales were summed. On June 4, Fiorina forecast sales would drop 5 percent to 7 percent. Wall Street expects third-quarter earnings of 14 cents a share, but in recent weeks, several analysts have lowered expectations to 12 cents to 13 cents.



The cloud over consumer spending has darkened in recent weeks on warnings from electronics retailers like Best Buy Co Inc and RadioShack Corp. HP expects PC sales to be the main victim of the merger, with home PC revenue dropping 18 percent over time. But it dominates the printer market, which produces the lion's share of HP profit, and it has rolled out a new line of photo printers.



"Strong demand in printing revenues is offsetting some of the computing weakness in the second quarter," Dan Niles of Lehman Bros. wrote on August 15. "While expectations are diminished from even June 4, HP is executing better than expected within this tough environment on the factors they can control, positioning themselves well for an improving IT demand environment in 2003 and benefiting from enterprise demand in the U.S., which seems to be stabilizing," he wrote.





(C) Reuters Ltd.

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