Compaq prepared to go it alone if Hewlett-Packard acquisition fails

By Mark Babineck The Associated Press
Thursday March 14, 2002

HOUSTON — While fire and brimstone are predicted at next week’s Hewlett-Packard Co. shareholder vote on its proposed purchase of Compaq Computer Corp., the atmosphere at Compaq has been comparatively serene. 

And where an HP management bloodbath and corporate turmoil are possible if investors nix the deal, Compaq and the analysts who cover it expect the Houston company to quietly continue restructuring and streamlining. 

In a message to employees this week, Compaq chairman and chief executive Michael Capellas said the company hopes the merger will pass, but it must focus on its own business just in case. 

“The most important thing we can do is to stay close to our customers and do the work necessary to deliver the quarter,” Capellas said. “Based on the outcome of the votes next week, we will communicate next steps.” 

Compaq shareholders are expected to favor the $22 billion acquisition overwhelmingly once the votes are tallied at a special shareholders’ meeting set for Wednesday. But massive opposition on the HP side of the equation, led by dissident director Walter Hewlett, has left Tuesday’s results in California too close to call in advance. 

If Hewlett and other investors torpedo the deal, he predicts a shakeup of company management. No such chaos is expected at Compaq, which turned a profit last quarter as it continues to restructure its businesses and reduce costs. 

Mike Winkler, a Compaq executive vice president, said the company hasn’t altered its strategies based on the possible acquisition by HP. 

“All the things we are doing today are things Compaq needs to do to be a strong stand-alone company or to be an excellent merger partner with HP,” Winkler said. 

Compaq, which grew from a small startup in the 1980s into a massive manufacturer and industry star in the 1990s, has struggled in recent years to overcome an expensive indirect distribution system, overexposure to the mature personal computer business and its 1998 purchase of Digital Equipment Corp. 

Compaq ousted former chief executive Eckhard Pfeiffer after the company revealed its first-quater results in 1999 would fall far short of expectations. That summer, the board surprisingly promoted Capellas, a former chief information officer. 

In Capellas’ 2 1/2-year reign, Compaq has focused on cutting distribution costs, refining its product line and expanding non-PC businesses, such as large-scale servers and computing services. 

Fallout of a failed merger could help Compaq if Hewlett, who has railed against Compaq’s still-heavy exposure to the PC business, gains influence at HP and causes it to shrink its share in the sector. 

“In the longer term that’s not necessarily bad for Compaq,” said Lehman Brothers analyst Dan Niles, noting that Compaq and Texas rival Dell Computer Corp. would have develop even more dominant market share in the PC business if HP scaled back. 

Niles also noted that Capellas’ background in information technology has helped Compaq connect with IT customers, saying Capellas “understand the mentality of those guys.” 

Carl Claunch, a research director at Gartner Inc., said a failed merger would leave Compaq to continue to grow its business computing business by itself, a job that would have been easier with HP as a partner. 

“They still have to address this challenge, just in a different way,” Claunch said. 

Richard Gardner, of Salomon Smith Barney, is another observer who believes Compaq has gotten well under Capellas and is healthy enough to survive on its own. 

“Our sense is that management finally sees the light at the end of the proverbial tunnel that Compaq entered into four years ago,” he wrote in a recent report. 

Though Compaq is promoting the merger, it also is girding for an independent future. For instance, Compaq is among the companies negotiating to rename the Houston Astros’ downtown baseball park. 

If the deal goes through, the Compaq brand will fade into HP and the new company’s headquarters will be in Palo Alto, Calif., though HP intends to keep a large manufacturing presence in Houston. 

As for the city, the nation’s fourth-largest, Niles said Houston should be fine regardless of what happens to its largest corporate citizen. 

“If Houston can survive the oil industry (collapse in the 1980s), I’m sure it will survive whether or not Compaq gets merged,” he said.