HP to report progress of merger, job cuts

Peter Henderson

SAN FRANCISCO: Hewlett-Packard Co. on Tuesday is expected to report on the

progress of job cuts and the success of its merger with Compaq Computer Corp. in

its first financial forecasts for the combined company since announcing the

deal.

The computer and printer began some 15,000 job cuts days after closing the

merger on May 7, although it has not revealed how fast the axe has fallen.

"Those notices have begun," Jim Milton, senior vice president,

Enterprise Systems Group and general manager, HP Americas, told Reuters on

Monday, referring to the cuts. But he declined to give details ahead of the

meeting between Wall Street analysts and chief executive Carly Fiorina's team.

The deal announced in September was the biggest technology industry merger

ever and sparked a long, nasty proxy battle in which a dissident board member

and founder's son Walter Hewlett argued Compaq would not help HP compete.

After suffering a beating in the markets since the contested plans were made

public, HP's stock was buttressed in early May, just before the launch of the

merged company, by upgrades from analysts. They concluded the stock was cheap

and much of the financial success in the next year could come from cost cuts.

"(Hewlett-Packard) not only represents a compelling valuation, but the

sources of its earnings are predicated on cost and head count reductions, which

we believe are eminently more 'count-on-able' than a bet on an economic or IT

spending recovery," Sanford Bernstein analysts Toni Sacconaghi wrote in his

upgrade report on May 2.

HP shares climbed after May 7 but have lost most of those gains, closing at

$18.85 on Monday, compared with $18.41 on May 7 and $23.21 on Aug. 31, the last

day of trade before the merger was announced.

Fiorina expects to make most of the 10 per cent cut in positions within six

to nine months of the launch date -- five to eight months from now -- and the

first line of attrition will come from early retirement buyouts offered some

9,000 US employees.

That buyout offer closes on Friday. Fiorina said earlier this month she will

give an update on that progress and financial forecasts. Technology researcher

Martin Reynolds of Gartner Inc. said news about the job cuts would be just in

time. "I feel they are almost beginning to push the envelope a little bit

in term of not announcing these layoffs," he said.

HP's Milton said that four of six to seven levels of management had been

named in most of his organization and that the threat of layoffs was not

paralyzing workers. "There is a little bit of apprehension, and I think it

is important to note that, but it pales in comparison to the positive euphoria

that exists," he said. "The momentum is obviously there."

Housekeeping



Housekeeping details of integrating and slimming the two companies will be
the highlight of the analyst conference, said Carl Hoagland, an analyst at State

Street Global Advisors. He said he is attracted by HP's value but still

concerned about merger execution.

He also was interested to hear what HP would say about rumors that No. 2

personal computer maker Dell Computer Corp., deposed from its status as PC

industry leader by the merger, was considering a move into printers, where HP

makes most of its profits.

Chief financial officer Bob Wayman is also expected to come out with new

financial forecasts, but Hoagland said they were not the key. "If they come

out with numbers, fine, I'll write them down with great care, but the

believability, the credibility just isn't there at this point. I think it is

really way too early," he said.

HP had forecast in September that the merger would cost the combined company

up to 4.9 per cent in lost revenue but save it $2.5 billion through cost cuts by

the end of 2004, with $2 billion of the cuts due by the end of 2003. It had also

said the deal would increase fiscal 2003 earnings by 13 per cent, compared with

the stand-alone company, in 2003, but it never gave figures for late 2002.

However, HP has not given guidance for the fiscal third quarter which ends in

July. Analysts polled by Multex expect 20 cents earnings per share, in a range

of 15 cents to 27 cents, on sales of $17.7 billion in the period. Wayman has

also said he will give some better historical performance for the merged

companies.

Gartner data for sales of powerful server computers in the first quarter

showed combined market share of HP and Compaq steady, buttressing HP's claims

that it has not lost customers during the turmoil of the merger. "The new

HP is doing better than the old HP. I am beginning to wonder how bad a shape

their computing division was in," Reynolds said, although he said HP Chief

Operating Officer Michael Capellas, who runs the company day to day, had some

tough cost cutting to do, and to do quickly.

"It is not really a honeymoon. He's got six months to make

changes," he said.