HP, Compaq to Merge in $25 Billion Deal

Sending shockwaves throughout the computing industry, Hewlett-Packard and Compaq Computer announced late Monday plans to merge in a deal valued at almost $25 billion. The resulting company, 64% owned by HP and 36% owned by Compaq, will have a combined revenue stream of $87 billion, just shy of top computer company IBM. The new HP will be split into four operating units and become the largest manufacturer of servers, handhelds, printers, and imaging devices.

The deal is expected to close in the first half of next year, but could be delayed by possible antitrust queries.

Both HP and Compaq have been struggling as of late, lagging behind rival Dell Computer in the personal computing arena and rapidly falling behind IBM for control of business services. The new company will focus much of its efforts on building infrastructure and offering support for businesses.

Michael Capellas, CEO of Compaq who will serve as President of the new HP, said in a statement, "We are creating a new kind of industry leader -- one founded on customer success, world-class engineering, and best of breed products and services. In sharp contrast to our competitors, we are committed to leading the industry to open, market-unifying architectures and interoperability, which reduce complexity and cost for our customers."

With combined sales, HP will surpass Dell as the top PC manufacturer, and nearly double Dell's share of the server market.

Perhaps most hurt by the deal will be HP foe Lexmark International, which held Compaq as its largest customer of printers.

Despite concerns that a merger will lead to many overlapping units and painful layoffs, both companies are very optimistic about the decision. By combining resources, the new HP expects annual savings to reach $2.5 billion.

"Clearly, the potential of this combination is compelling, but we understand the magnitude of the challenge and the need for discipline and speed. We're helped by the fact that both companies have been pursuing similar organizational structures and sales force models, and there is immense talent resident in both organizations," said Carly Fiorina, who will remain Chairman and CEO of HP.

HP will remain headquartered in Palo Alto, and utilize Compaq's Houston presence for research and development.

Stated Fiorina, "At a particularly challenging time for the IT industry, this combination vaults us into a leadership role with customers and partners -- together we will shape the industry for years to come."