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Hewlett Packard To Buy Compaq

Hewlett-Packard Co.'s plan to buy Compaq Computer Corp. — in the computer industry's biggest merger — met a chilly reception on Wall Street Tuesday as investors questioned whether the two companies could merge smoothly and whether regulators will let them.

Hewlett Packard's stock spun into an 18.6 percent nosedive, falling $4.32, to close at $18.89 on the New York Stock Exchange, the worst one day sell-off for the company since 1987. That meant the value of the deal fell from $25 billion when first announced Monday night to $20.3 billion by the end of the day Tuesday.

For the battered computer industry, though, it's a blockbuster deal, reports CBS News Business Correspondent Anthony Mason.

The $20.3 billion stock deal would create a rival to IBM with sales of $87.4 billion and easily strip Dell Computer Corp. of its No. 1 rank among PC makers.

The merger of the tech titans creates the world's largest supplier of personal computers and printing hardware, with nearly $90 billion in combined revenue, but slumping sales.

The merger will have to be reviewed by U.S. and European regulators, although HP and Compaq said their main overlap, in personal computers, would not scare regulators and probably be approved in 6 to 9 months, a scenario some analysts endorsed.

"I don't see any antitrust problems in the basic PC business," said Doug Melamed, a former antitrust official at the U.S. Justice Department who is now a partner at the law firm Wilmer, Cutler & Pickering.

Others said the combined firms' dominance in U.S. retail sales could be a stumbling block.

"I believe this partnership is a foundation to change the industry," said Compaq Chief Executive Michael Capellas, who would become president of HP.

"This deal makes sense frankly in good times or in bad," said HP chief executive officer Carly Fiorina.

For the computer industry lately it's been very bad.

"In computers, we've really gone from the best of times, in '99 and 2000, to the worst of times," UBS Warburg analyst Don Young told CBS News.

In the spring quarter computer shipments actually fell for the first time in 15 years. It's the fallout from the dot-com disaster, as corporations slashed their tech spending.

"The PC market continues to be very cutthroat, very razor-thin margins, said Computerworld editor Maryfran Johnson. "It's really hard to make a profitable business out of it."

Both companies have struggled in the slowdown. Compaq lost $279 million in the most recent quarter, and Hewlett Packard's profits plunged nearly 90 percent.

"What those tough times are illustrating clearly is that there is an opportunity to get more cost effective and efficient," said Fiorina.

The two companies have already announced more than 17,000 job cuts this year. The merger, they said, will mean another 15,000 jobs will be eliminated. But Computerworld Editor Maryfran Johnson warns a leaner company may not be meaner.

"When you have to struggling companies that merge, whether they can actually merge and create a stronger company is the real question," said Johnson, "and historically in the computer industry, that has not been the way it works out."

"You have two huge organizations that are under-performing and now you're going to complicate this by putting them together," said Craig Chodash, Senior Vice President and investment officer at J. &. W. Seligman & Co. Inc. in New York.

"It's more of an opportunity for Dell," he added as the market sent Dell stock up 4.4 percent to $22.31 on the Nasdaq.

The merger would mark the end of the line for Compaq, which was formed by three engineers at Texas Instruments in 1982. Compaq, one of the success stories of the tech sector, grew from a sketch on the back of a place mat in a Houston restaurant to become the youngest company to reach the Fortune 500.

Hewlett-Packard, created in 1939 to make network testing equipment called oscilloscopes, is considered the original Silicon Valley company, and the Palo Alto garage where it was formed is now a national monument.

©MMI CBS Worldwide Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. Reuters Limited contributed to this report

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