Turmoil might help HP: Analysts

Peter Henderson

SAN FRANCISCO: Hewlett-Packard Co. is back selling its plan to take over
Compaq Computer Corp., facing the same skeptical investors who have stripped the
deal of a third of its value since it was unveiled.

But the devastating air attacks in New York and Washington, which could tip
the global economy into recession, may also have improved the chances for the
computer industry's biggest deal ever to go through as planned, analysts said.

The shakier economy could actually strengthen management's hand by
underlining the need for consolidation in the computer industry as business
slows, they said. "In a tougher economic environment, you see more
consolidation, more mergers," said Lehman Brothers analyst Dan Niles, one
of the most pessimistic on Wall Street about the chance for a quick turnaround
for the technology sector.

European regulators, considered more likely to stop the deal because of
competition concerns, would be less eager to interfere if the economy soured,
Niles said. "To some extent I could argue the regulators are probably less
likely to derail a merger," he said. The deal could offer huge rewards that
hinged on deft integration, he added.

To be sure, last week's destruction of the World Trade Center and damaging of
the Pentagon, has further eroded the value of HP's shares along with the broad
US stock market.

HP shares fell about five per cent on Wednesday and Compaq's lost about 4.6
per cent. Since the proposal was unveiled on Sept. 3, investors have savaged
both, dragging the deal's value down to $16 billion from $25 billion on the
morning it was announced.

Under the terms of the merger, Compaq shareholders would receive 0.6325
shares of HP for each share owned. That valued each share at Wednesday's close
at $9.74, a near 16 per cent premium to Compaq's close at $8.13. That represents
an unusually high level for the spread, say arbitrage traders, who trade based
on the likelihood of deals going through. Before the hijackings, deals
considered "safe" - those not likely to fall apart - typically traded
at spreads of 9 or 10 per cent, traders said.

But analysts and arbitrage traders say the benchmarks for "safe"
spreads ought to be reconsidered to account for the more uncertain trading
environment.

"Should the Compaq deal be (negatively) affected by the World Trade
Center disaster? I don't see why," one trader said. The deal carries no
restrictions, or collar, that would automatically cancel it if stock prices
dropped too sharply.

"I know they are determined to make it happen. It is the will of the
management versus the will of the market," said investment banker Afsaneh
Naimollah, a managing partner Chela Technology Partners. "Personally, I
think it is a bad thing."

Hewlett-Packard chief executive Carly Fiorina says the deal has been
misunderstood. HP would take the No. 1 spot in personal computer sales from Dell
Computer Corp if it and Compaq's operations were merged. Analysts have said it
is likely to lose sales to competitors.

Even so, Fiorina says that is not the point. Resuming her lobbying, she told
European industry analysts this week that more services and high-end computer
systems - areas dominated by International Business Machines Corp. - was the
key.

"This is not predicated on PCs. It's actually all about enterprise
computing and professional services," she said. Earlier this month she told
an audience in Boston the firms "fit together like a zipper".

Share prices now 'defensible'

Sanford Bernstein analyst Toni Sacconaghi said the hijackings and questions
about whether the companies could successfully integrate appeared to have
created a "compounded uncertainty" that hit the stock.

But he also saw HP's lucrative printing franchise alone worth more than $20
per share, offering support to the stock. "You are starting to get to
highly defensible valuations." The volatility of US markets after the
attacks has also taken the spotlight off Fiorina, potentially giving her time to
make her case, he said. But it was uncertain whether that would be enough to
make a difference, he said.

Management had girded for battle before they announced their plan, Niles
said. "They knew what they were getting into before they announced the
deal." The biggest losers so far have been Compaq shareholders, but that
struggling company is in no shape to go it alone anyway, said Bear Stearns
analyst Andrew Neff, who has long argued the industry faces consolidation.

"I still think Compaq needs this deal to happen," Neff said.

(C) Reuters Limited 2001.