HP and Compaq Merge to Form $87 Billion Company.

Hewlett-Packard Co. (HP, Palo Alto, CA) and Compaq Computer Corp. (Compaq, Houston, TX) have announced a definitive merger agreement to create an estimated $87 billion global technology company. According to a press release issued by HP, the combined company will have the top worldwide revenue positions in servers, access devices (PCs and hand-helds) and imaging and printing, as well as leading revenue positions in information technology (IT) services, storage and management software.

The merger is expected to generate cost synergies reaching approximately $2.5 billion annually and drive a significantly improved cost structure. Based on both companies' last four reported fiscal quarters, the new HP would have approximate assets of $56.4 billion, annual revenues of $87.4 billion and annual operating earnings of $3.9 billion. The newly formed company would also have operations in more than 160 countries and over 145,000 employees.

Carly Fiorina, chairperson and chief executive officer of HP, will be chairperson and CEO of the new HP. Michael Capellas, chairperson and chief executive officer of Compaq, will be president. Capellas and four other members of Compaq's current board of directors will join HP's board upon closing of the merger.

Under the terms of the agreement, unanimously approved by both boards of directors, Compaq shareowners will receive 0.6325 of a newly issued HP share for each share of Compaq, giving the merger a current value of approximately $25 billion. HP shareowners will own approximately 64 percent and Compaq shareowners 36 percent of the merged company. The transaction, which is expected to be tax-free to shareowners of both companies for U.S. federal income tax purposes, will be accounted for as a purchase.

The transaction is expected to be accretive to HP's earnings per share in the first full year of combined operations based on achieving planned cost synergies. Cost synergies of approximately $2.0 billion are expected in fiscal 2003, the first full year of combined operations. Fully realized synergies are expected to reach a run rate of approximately $2.5 billion by mid-fiscal 2004. These anticipated synergies will result from product rationalization; efficiencies in administration, procurement, manufacturing and marketing; and savings from improved direct distribution of PCs and servers.

Subject to regulatory and shareowner approvals and customary closing conditions, the transaction is expected to close in the first half of 2002. The merged entity will be headquartered in Palo Alto and will retain a significant presence in Houston.

The new HP will be structured around four operating units: a $20 billion imaging and printing franchise to be led by Vyomesh Joshi, currently president, Imaging and Printing Systems, of HP; a $29 billion access devices business to be led by Duane Zitzner, currently president, Computing Systems, of HP; a $23 billion IT infrastructure business, encompassing servers, storage and software, to be led by Peter Blackmore, currently executive vice president, Sales and Services, of Compaq; and a $15 billion services business with approximately 65,000 employees in consulting, support and outsourcing to be led by Ann Livermore, currently president, HP Services.

The chief financial officer of the combined entity will be Robert Wayman, chief financial officer of HP. The integration team will be led by Webb McKinney, currently president of HP's Business Customer Organization, and Jeff Clarke, chief financial officer of Compaq.

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