Caroline Humer
NEW YORK: Compaq Computer Corp.'s third-quarter shortfall gives shareholders
yet another reason to dislike its already unpopular plan to merge with
competitor Hewlett-Packard Co., investors said on Tuesday.
Compaq, the No. 2 personal computer maker, said on Monday evening that it
would post an operating loss and a sales shortfall in the quarter ended Sept.
30. It blamed the weak economy, stiff pricing, and shipment issues related in
part to the Sept. 11 attacks on the World Trade Center.
The financial warning underscored the intense competition and weak demand in
the computer industry. It also may provide Wall Street with a new reason to
battle the merger between Houston, Texas-based Compaq and computer and printer
maker Hewlett-Packard, investors said.
Since Hewlett announced its plans to buy Compaq on Sept. 4, unhappy investors
have shed Hewlett shares, pushing the value of the deal down to $16.4 billion
from $25 billion. "Before anything happened on Sept. 11 the response to the
merger was not positive," said Alan Loewenstein, co-manager of the John
Hancock Technology Fund, pointing to the stock declines.
"Now the business conditions have definitely gotten worse for the PC
market, most notably Compaq and Hewlett. You just wonder what's going to happen
as we go forward to make this merger work," he said.
Investors remain skeptical
Indeed, shareholders who have been against the deal from the beginning
continue to say that the merged entity will not be able to compete more
effectively against competitors Dell Computer Corp. and International Business
Machines Corp. than they can alone.
"We don't like the merger. Our strong preference would be that the
companies reassess, take their cue from the market and the analysts who are
universally negative about it and both proceed independently," said David
Katz, chief investment officer at Matrix Asset Advisors, which manages $700
million in investments. Katz, who owns both Compaq and Hewlett shares, said that
he believes after a month of stock declines, the board of directors of both
companies are under pressure. "I think both boards have to be rethinking
the combination in light of the markets' fiercely negative reaction," Katz
said.
Compaq shares weakened on Tuesday, giving up about 3 per cent, or 24 cents,
to close at $8.09. Hewlett traded down 3.2 per cent, or 50 cents, at $15.10. The
deal's "spread" - or the difference between where Compaq's shares are
trading and where the deal values them at - closed Tuesday at 18.2 per cent, a
level most arbitrage traders consider dangerous. "Safe" spread
typically lie in the 9 per cent to 10 per cent range.
"The question in everyone's mind is, what kind of support does Carly
(Hewlett Chief Executive Carly Fiorina) have from the board right now,"
said one risk arbitrager, who asked not to be named. "There have to be some
doubts creeping into the board's minds."
Capellas still selling the deal to investors
Fiorina and Compaq Chief Executive Michael Capellas have been selling the
deal to the boards of directors, employees and investors.
After an aggressive first week of September, investor communications were
interrupted as the attacks on the World Trade Center halted all flights the week
of Sept. 11 and then the following week as companies slowly got back to
business, Capellas said in a telephone interview with Reuters on Monday. They
have since resumed, he said, adding that the merger is going forward, despite
declines in the stocks. "This is a fixed price exchange. The merger was not
dependent on any particular stock price," Capellas said.
"The long-term fundamentals have not changed. If anything the long-term
fundamentals have just moved to the point where all the basic rationale of the
deal is even stronger," he said. US Bancorp Piper Jaffray analyst Ashock
Kumar disagreed.
"A maturing and commoditized PC and enterprise market mandates
structural changes to the biz model, which will not manifest in the HWP/CPQ
merger," he wrote in a research note.
(C) Reuters Limited 2001.