Carly Fiorina says no change in merger plans

By : |October 4, 2001 0

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

"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

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

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

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.

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