Carly Fiorina says no change in merger plans

Peter Henderson

PALO ALTO: Hewlett-Packard Co. chief executive Officer Carly Fiorina vowed on

Wednesday to press ahead with plans to buy Compaq Computer Corp. although

business nearly halted after the announcement and has suffered more since the

Sept. 11 attacks.

Fiorina, chairman and CEO of Hewlett-Packard, said the case for merger was

even stronger in a weak economy and that the merger plans left room for more

cost savings to be wrung out of the combined operation without cutting more

jobs.

"We have not changed our merger plans based on the economy," she

said. "We didn't do this deal because the economy was bad, but this deal is

even more compelling in a bad economy."

Analysts have panned the deal and Hewlett-Packard shares have fallen 31 per

cent since its announcement, but Fiorina said in an interview with Reuters that

the directors of both companies still supported the merger.

"The boards of both sides are not getting weak at the knees," she

said, adding that the deal's details would not be changed due to the economic

downturn or for other reasons. "People assume that because we kept it

quiet, it was a rushed affair. It wasn't."

The sharp decline in HP shares since the merger was announced on Sept. 3 has

taken the value of the all-stock to deal to around $17 billion from an original

$25 billion.

Economy 'stopped dead'



Fiorina said that the wider economy might be able to recover in the second half
of next year as she had forecast prior to the hijacking attacks on New York and

Washington.

Rate cuts by the Federal Reserve and the promise of increased government

spending could offset the effects of the attacks which shook the business world

and caused widespread disruptions to spending and investment, Fiorina said.

"Consumers and businesses literally stopped dead in their tracks,"

she said.

HP employees had been consumed the previous week with the merger announcement

- a factor that Compaq cited as a reason for its own sales shortfall in the

September quarter.

"There was a week of time there when the announcement hit the market

when our employees were focused on the announcement and explaining it to

customers," she said. "I don't think we saw or anticipate a long-term

pause." In addition, a typhoon in Taiwan in September had hurt HP by

disrupting its suppliers, Fiorina said, although she declined to comment

specifically on how HP's quarterly results would be affected, since there is

still a month left in the period.

"It was a disaster for that country and for the supply base," she

said of the powerful storm, which Compaq also cited as a reason that its own

sales in the September quarter would be short of forecast by more than $1

billion.

Fiorina said the planned savings from the merger did not include actions like

outsourcing more Compaq manufacturing. The two firms may also be able to get

better prices for components and supplies than the one per cent procurement

savings incorporated in current plans, she said.

HP would "not necessarily" increase job cuts after the merger in

the face of the economic downturn, she said. HP and Compaq plan as independent

companies to shed a combined 15,000 workers and to cut a further 15,000 after

they merge.

HP will also not consider improving the terms of the merger for Compaq

shareholders, Fiorina said, although she conceded the decline in stock prices

for both companies had been steeper than she had anticipated.

Bear market surprises



Fiorina said investors did not clearly understand the deal's potential and were
focused on personal computers rather than the deal's real keys: services and

high-end computing. "Surprises in a bear market are viewed as bad,"

she said.

Some analysts have questioned whether Hewlett-Packard can move quickly enough

to keep its customers during the merger and if integration risks outweigh

possible gains at two companies not known for quick movement.

"Are they amalgamating two opportunities or amalgamating two

struggles?" asked J P Morgan analyst Daniel Kunstler. But Fiorina said

Compaq management would help shake up and reinvigorate the 62-year-old HP, known

for its consensual management style. "They are more resilient to change. In

some ways, they are more aggressive," Fiorina said.

Compaq, which was the youngest company to make it to the Fortune 500, helped

to found the market for portable computers in 1983, but lost its top ranking in

the PC market to competitor Dell Computer Corp. and its more financially

efficient direct sales model earlier this year.

Fiorina has repeatedly said HP would not spin off its personal computer and

lucrative printing divisions, both seen as commodity products compared to

higher-end server machines, storage systems and services. Fiorina argued that

the future for printers and handheld computers was tied to the Internet and the

businesses stood to benefit from the alliance with network technology that HP

offered.

Mark Specker, an analyst at SoundView Technology Group, said HP and Compaq

had pushed the merger so hard that retreat would be difficult. "I don't

think they've got a lot of room to back it down," he said. Fiorina agreed

her own future was tied to the deal.

"I think the company's success will be my legacy," she said.

"The company's failure will be my failure, with all the predictable

consequences of that."

(C) Reuters Limited 2001.