If merger is approved, Fiornia's problems have only just begun

While Carly Fiorina may have gotten her wish, it also appears Walter Hewlett's

warnings about the negative impact of the merger are materializing faster than

anyone expected. Meanwhile, speculation has also surfaced that Hewlett-Packard

may have manipulated fourth quarter sales and profit figures in order to drum up

support for the merger with Compaq.






Shares of Hewlett-Packard fell to just over $18 on Friday after an internal memo
was leaked to the media in which a high-level HP executive warned that revenue

and profit in the company's services division were well below targets and that

the Compaq merger would negatively affect the company's services business.






The memo came from Ann Livermore, who heads HP's services division. It was sent
to people on her staff and upper management one day before stockholders were to

vote on the merger. Livermore wrote that orders for HP's technology services

were very soft. She also said HP's fight over the Compaq deal had been a

"distraction'' for employees and customers.






Services bring in 17 per cent of HP's $45 billion in revenues and was the only
major product sector that showed growth in 2001. If the decline is business is

due to customer uncertainty, HP faces major problems because the integration

process of the two companies could take two to three years.






HP spokeswoman Rebeca Robboy denied HP had withheld the potentially damaging
information. She said the memo was a "routine quarterly update to rally her

troops" and that HP felt no need to update its financial guidance to Wall

Street.



The memo was not the only indication that the problems for Fiorina's effort to
successfully integrate the two companies have only just begun.






Financial analysts on Wall Street are increasingly skeptic about the
better-than-expected fourth quarter results reported by HP in February. The Palo

Alto company's reported sales of personal computers grew an astonishing 40 per

cent in the last three months of 2001. The industry average was 6.7 per cent.

Dell's sales grew only by comparison.






Analysts said they believe HP may have pushed more sales into the distribution
channel while under-reporting the costs associated with those sales. HP has

strongly denied it had manipulated sales to help sell the merger to investors.

Company officials said the firm had "done nothing inappropriate."






When HP reports its first quarter results in May, a reversal of PC sales results
would be the expected result of any "channel stuffing." Disappointing

results will only make the already daunting task Fiorina is facing all the more

difficult.