Hewlett vs. Hewlett-Packard: HP’s Takeover of · PDF fileon the proposed HP-Compaq...

FIN-02-006 Revised October 3, 2003

American University

_____________________________________________________________________________________

Yating Chang and Sanda Pesut, graduate students at Kogod School of Business, prepared this case under the super-vision of Professor Robert Hauswald as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

© Robert B.H. Hauswald, Kogod School of Business, American University, Washington, DC 20016-8044. To order the case or request permission to reproduce it, please send email to [email protected]. No part of this case study may be reproduced in any form or by any means, or used without prior consent.

Hewlett vs. Hewlett-Packard: HP’s Takeover of Compaq

Robert M. Laverty, Director of Deutsche Asset Management Inc. (DBAM, the asset management division of Deutsche Bank, AG, Frankfurt, Germany), and Chairman and voting member of Deutsche Bank’s Proxy Working Group, is glancing at his watch. It is almost a quarter to 8AM. in Cupertino, California, and Carleton (“Carly”) Fiorina, the CEO of Hewlett-Packard (HP), is making her closing pitch to the five-member Proxy Working Group (PWG) of the DBAM from the other end of the teleconfe rence call. “Gentlemen, we appreciate your time. I need to go and get ready for a shareowner meeting,” her clear voice continued “This is obviously of great im-portance to us as a company. It is also of great importance to our ongoing relationship. We very much would like to have your support here. We think this is a crucially important decision for this company.”

Like so many other presentations by Fiorina, Laverty knows that this one is no exception: it is persuasive and compelling. But is it good enough to convince the PWG to vote DBAM’s 1.3% of HP stock (about 25 million shares) in favor of HP’s acquisition of Compaq? What about DBAM’s own analysis and earlier negative reaction to the deal? The recommendation by Institu-tional Shareholder Services (ISS), an influential provider of proxy voting and corporate govern-ance services, in favor of the merger?

It is only 15 minutes before HP shareowner meeting begins at Flint Center in Cupertino.

Just before Fiorina’s presentation, PWG had also heard the pitch from Walter B. Hewlett (Hew-lett), the son of co-founder William Hewlett, who publicly opposed the deal and began a very public proxy battle to scuttle the merger. With the arguments on both sides well known and re-hashed for months in public, the decision is coming down to a call of judgment and, in the last consequence, whose presentation and business case is more persuasive.

Of Bankers and Asset Managers

While DBAM’s PWG members debated yet again the arguments for and against the merger and the presentations’ respective merits right after Fiorina left the call, Laverty’s thoughts went back

FIN-02-006 Hewlett v. Hewlett-Packard

2

to just five days ago when Robert Thornton, Managing Director of Technology Mergers and Ac-quisition at Deutsche Bank Securities, Inc., Deutsche Bank’s North-American investment bank-ing operation, had called to suggest that Carly Fiorina be given the opportunity to directly pre-sent the case for the merger to DBAM. After initially refusing, DBAM had accepted the telecon-ferences with Walter Hewlett and Carly Fiorina. What now looked like an eternity ago, the PWG had initially decided to oppose the merger. Subsequently, Robert Thornton, arranged these pres-entations on the grounds that it was appropriate for the proxy contestant to present their positions on the proposed HP-Compaq merger directly to DBAM, an important institutional shareholder, given the close nature of the proxy contest.

Ever since, Laverty had worried about potential conflicts of interest and wondered if

Thornton’s initiative to organize this conference call might actually serve the latter’s business interests to the detriment of DBAM clients. At the very least, if news of this meeting leaked out, uncomfortable questions about due process, “Chinese Walls” between asset management and investment banking, and compliance might be raised. Has Robert Thornton gone to far and breached any of the internal barriers between the business units? Or have DBAM and the PWG gone too far in accommodating him? After all, it was Thornton who had insisted that Laverty and his colleagues have a teleconference with HP managers and then even attended the meeting leading up to DBAM’s revote of its HP stake. While Thornton had ostensibly avoided from participating in the substantive discussions of the proposed merger within DBAM because of his group’s prior business relationship with HP, a whiff of impropriety was palpably hanging in the air.

“What happens if the merger doesn’t go through?” Laverty hears a colleague ask bringing

him back to the present. “The fact is that HP’s stock rose whenever there was news that put the deal in doubt.” Listening to their discussion, Laverty hopes is that the PWG will decide its vote based on the benefits of the transaction for DBAM’s institutional clients and private investor rather than the investment banking group’s interests. After all, just days before, the same group had decided to vote against the deal before the lobbying of the bankers started.

Robbing his stiff neck, Laverty tries to relax and feels there is no more he can do but

wait. Again, his mind drifts away from the discussion in the conference room. Just like so many other times in the past two days, the whole history of HP’s controversial acquisition of its rival Compaq and, especially, the ensuing proxy battle that had gone on for the past six months comes to his mind.

The Deal on the Table On the evening of Labor Day September 3, 2001, Hewlett-Packard (HP, NYSE: HWP) and Compaq (NYSE: CPQ) issued a joint press release announcing the combination of their busi-nesses under the terms of a merger agreement that called for each Compaq share to be exchanged for 0.6325 share of HP common stock. With HP and Compaq shares trading at $22.93 and $12.25, respectively as of August 31, 2001, the last trading day before the long weekend, the deal valued Compaq at $25 billion and offered an acquisition premium of 18.39% (Exhibit 1). The parties expected to complete the deal by June, 2003 subject to gaining regulatory and sharehold-

Hewlett v. Hewlett-Packard FIN-02-006

.

3

ers’ approvals. In case the deal fails due to actions taken by any of the parties, the other firm is entitled to $675 million in compensation, essentially amounting to a breakup fee.

The stock market reaction to the deal’s announcement was swift and severe. When trad-ing opened the next morning HP’s share price fell by more than 25%. By the end of the day, HWP finished 18.13% below the previous close and CPQ 10.29%. Within a month after the an-nouncement, the share prices of HP and Compaq had plummeted by 30.56% and 32.49%, re-spectively shrinking the deal’s value to $17.6 billion

Meanwhile, competitors seemed delighted by the proposed merger. When asked about

the prospect of facing a combined HP-Compaq, Michael Dell replied that “[b]y and large, I see [the deal] as an opportunity to us.” Michael Lehman, CFO of Sun came to a similar assessment: “In the near term, it’s, actually a gold mine for us…. It doesn’t change our strategy a bit. It makes [HP-Compaq] a larger, more confused competitor – more dependent on PC.” Bear Stearns analyst Andrew Neff, who upgraded Dell to a “buy” from “attractive” following the merger an-nouncement, pointed out that Dell, the No. 1 player in the PC market, will have a year in which the No. 2 and No. 4 players in the sector are distracted with integration issues.

The Changing IT Industry The biggest merger in the information technology industry to date came during a slowing econ-omy and IT market. In the first half of 2001, the PC industry experienced a contraction for the first time in its history, signaling the maturing of a sector that had enjoyed 15 years of uninter-rupted growth fueling the rise of some of the world’s top technology players over the past two decades. Believing that the “hot box” era is over, many key players in the computer industry such as HP, Compaq, Dell, Sun, EMC, Lexmark, and IBM, had concluded that changing cus-tomer requirements, technical advances and intensified competition will drive the structural change in the industry. As a result, the industry had been playing a waiting game to see which major player would start the inevitable process of consolidation.

The most aggressive player is Dell Computer, a relative newcomer by industry standards. In the midst of a global IT spending slowdown and saturated PC market, Dell, the worldwide market leader, is aiming at grabbing 40% of the market on the back of its pioneering direct mar-keting, just- in-time logistics, and built-to-order manufacturing. By undercutting competitors in price the company is also leveraging its business model to expand into other segments such as high-end servers and storage that are rapidly becoming a commodity business. Conversely, IBM, emerging from its difficult early 1990s, has repositioned itself by focusing on high-growth IT services and investments R&D-intensive new products all but abandoning the consumer PC market.

HP, however, seemed in need of new directions. Long a technology leader in high-end

systems and printing and imaging, the firm had failed to capitalize on the “net economy” boom of the late 1990s and to keep its innovation pipeline flowing. While some businesses were per-forming well, others were clearly left behind by the fast-moving industry. Since 1999, HP had


4

been searching for new strategic avenues to rescue its struggling PC business and to revive the former glory of the company that “Bill and Dave” built in 1939.

The Acquirer: Hewlett-Packard

From the Garage to the World

Flipping a coin in 1939, William (“Bill”) Hewlett and David (“Dave”) Packard, two friends and fellow graduates in Electrical Engineering at Stanford University, named their partnership “Hew-lett-Packard.” It had all began in 1938 at a small garage in Palo Alto, California, where the two assembled their first product: the resistance-capacity audio oscillator, an electronic instrument used to test sound equipment.

Ever since, their test-and-measurement business grew rapidly. In 1942, they left the one-car garage and moved into the HP-owned “Redwood Building” in Palo Alto. On August 18, 1947, HP was incorporated with Dave as president and Bill vice president. That same year, HP had $0.86 million in revenues. By the time the company went public on November 6, 1957 for $16 per share, it had reached $28 million in revenues.

A year later, HP arrived in Europe by establishing a marketing operations in Switzerland and building a manufacturing plant in Germany. As a further sign of its global outlook, HP en-tered into Asia market and formed the first joint venture in Japan in 1963. By then, overseas sales accounted for 18% of HP’s $117 million business. As HP continued its global expansion, it began branching out from its core business into related fields such as medical electronics and analytical instrumentation.

In 1972, HP had its first block-buster product that garnered it widespread attention. The

firm ushered in a new era of “portable computing” by introducing the “all time product:” HP-35, the first scientific handheld calculator allowing engineers all over the world to forever retire their slide rules. In 1976, the company reached its very first billion in sales, and passed the $2 billion mark in 1979.

The Blockbuster: HP Printing and Imaging By the late 1980s, HP had become a major player in the IT industry with a full range of com-puters, from desktop machines to portables and powerful minicomputers. The most enduring ac-complishment occurred in 1984, when, HP adapted inkjet technology developed at HP Labs and entered into the printer market with the launch of inkjet printers. The high-quality, inexpensive HP inkjet printers spelled the doom of dot-matrix printers and established the firm as a major player in the printer market.

Repeating this success, the company also adapted technology originally developed at Xerox’s PARC and launched the first laser printers that connect directly to personal computers


.

5

(and networks). Within a couple of years, the HP LaserJet printer line became not only the dominant product in the printer market but also the company's most successful single product line. As a result, Hewlett-Packard established itself as the most recognizable brands in the printer business. As HP celebrated its 50th anniversary in 1989, it had grown into a global enterprise with annual sales of $11.9 billion and 95,000 employees in large part on the strength of its print-ing and imaging division.

Reinveningt the “HP Way” HP believed that its success was in large part due to a management philosophy radically different from the top-down management style of most companies of its days. In 1957, the founders ar-ticulated a company vision that defined HP’s corporate objectives as: profit, customers, fields of interest, growth, our people, management and citizenship. These seven focal points of manage-ment served as a basis of HP’s decentralized, engineering-centered approach to business that later became well known as the “HP Way.” Soon a standard in “high tech,” its guiding ideas evolved into a full- fledged set of management principles later codified as “management by ob-jectives” by academics. It involved

• Encouraging technology and innovation • High level of achievement and contribution • Integrity in conducting the business • Teamwork and flexibility • Respect and reward system for employees

However, by the late1990s, the “HP way” seemed to have lost its luster when the com-

pany missed out on the high-tech boom and the economy shifted into “gold-rush” mode with the dot.com boom. HP’s revenue growth, which in the mid 1990s regularly hit 20% per annum, was virtually flat in 1998 (Exhibit 2). Having been a leader in change through R&D, organizational design, and internal innovation for half a century, HP seemed incapable of responding to the ex-ternal shifts in IT industry. As an executive Vice President in the firm’s Computers and Printers Group observed, “HP has got tremendous potential, people, technology, a great brand name, but there’s something missing that would move the company to the next level.”

In early 1999, Lew Platt, CEO since 1992, laid out the “e-service” vision aimed at rein-

venting HP. In the next six months, HP

• decided to spin off its old core, the measurement and components business, as a new company, Agilent Technologies comprising its measurement, components, chemical analysis and medical businesses;

• came up with the Net Strategy, and • started the search for a new CEO.


6

Under New Management

When Platt retired in July 1999, HP named Carleton S. Fiorina as its new President and CEO. Prior to coming to HP, Fiorina had worked as a professional sales manager at AT&T and risen to become President of Lucent Technologies’ Global Service Provider business unit. Fiorina vaulted into spotlight with her participation in AT&T’s successful spin-off of its phone equipment bus iness, Lucent Technologies, in 1995. This IPO raised $2.7 billion from investors and reinvented the old-line phone maker as a pioneering company in communications ne tworks.

On September 22, 1999, Carly Fiorina managed several firsts when becoming CEO of

HP: she was the first outsider to be named to the company’s top post, and also the first CEO without engineer background in the 65–year-old history of HP. With her background in market-ing, Fiorina’s accession to the position was a tacit admission that HP was less in need of a tech-nological visionary than an experience marketing manager as the firm’s product markets became increasingly commoditized.

However, Fironia seemed to have well grasped the crucial importance of R&D to both

HP’s management style and products. Based upon the unifying concept of “inventing,” she in-troduced a new logo and brand campaign. At the same time, she also tied bonuses to how well HP performed compared with rivals instead of pegging them to internal sale targets. After the successful spin-off of Agilent, she set off to reposition the company as a major IT player through external rather than internal transformations.

To this end, HP entered into discussion with PricewaterhouseCoopers (PwC) about a po-

tential takeover of PwC’s consulting business, particularly strong in enterprise computing and IT services. At the same time, HP also cultivated contacts with its erstwhile rival, Compaq, about a potential combination of businesses. While the negotiations PwC did not lead anywhere and were soon abandoned, her pursuit of Compaq culminated on September 3, 2001 in the announcement of the two company’s $25 billion merger.

The Target: Compaq Start-up Compaq Computer Corporation was founded by three senior managers of Texas Instruments, Rod Canion, Jim Harris and Bill Murto. Sketched on a paper place mat in a Houston pie shop, the entrepreneurs designed their first product: a portable personal computer. In February 1982, Sevin-Rosen Partners, a high- tech venture capital firm, provided start-up financing for the the new company that established its headquarters in Houston, Texas. Ben Rosen, president of Sevin-Rosen, became a director of the company beginning his two decades of active involvement in the firm.

Compaq’s initial public offering in December 1983 raised $67 million; a year later the fast-growing firm moved its listing from NASDAQ to the NYSE. Over the next decade, Com-paq’s growth was nothing short of spectacular. First year revenues reached $111.2 establishing a


.

7

U.S. business record at that time. In April 1986, Compaq joined the list of Fortune 500 compa-nies, faster than any other firm in history. Five years later in 1991, Compaq reached more than one billion dollars in sales, setting another record as the fastest company to reach that mark. This success was in part due to Compaq’s earlier decisions to treat the computer as a commodity rather than high-tech product and to expand on a global scale almost from the onset. By 1995, Compaq had achieved its avowed goal and become the Number One PC maker worldwide.

Scope- up Aiming to strengthen its position in the IT industry, Compaq pursued a double strategy. On the one hand, the company moved into the higher end of the IT market by introducing the first server product in 1992 and entering into the workstation segment in 1996. On the other hand, it also started to engage in strategic acquisitions to round out its product lines and broaden its compe-tencies.

The acquisitions of Thomas-Conrad, NetWorth, and Mircocom in 1995 and 1996 pro-vided Compaq with networking products and a foot in the nascent internet-technology market. To complement its growing line of hardware products with IT services, Compaq acquired Tan-dem Computer in 1997. In 1998, Compaq acquired Digital Equipment Corporation (DEC) for $9.6 billion. With DEC’s high-end hardware and IT consulting businesses, Compaq had become not only the top PC company but also the number 2 IT company in the industry behind IBM.

Problematic Merger Integration As Compaq moved from being primarily a PC manufacturer to being “all things to all custom-ers,” the distractions of integrating both Tandem and DEC together with an increasingly com-petitive PC market led to major problems. The once hot startup began to stumble (Exhibit 3). In particular, it was loosing PC market share to its local rival Dell Computer, whose direct sale and built-to-order business model gave it a huge cost advantage in Compaq’s core business and con-sumer markets. As a result of the botched integration and problems in its PC business, investors lost confidence driving down its stock price from its peak at $42 in February 1999. The Fixer By mid 1999, Ben Rosen and institutional shareholders had lost their confidence in Eckhard Pfeiffer, the hard-charging German-born CEO who had been the architect of Compaq’s highly successful global operations and, more recently, less convincing acquisition spree. In July 1999, Michael D. Capellas, previously senior vice president and CIO of Compaq, replaced Pfeiffer at the helm of the company, taking on the challenge to reinvigorate Compaq, a company that had lost its focus in the eyes of investors.

Born in Warren, Ohio, Capellas had started his professional career at Republic Steel be-fore joining the glogal energy services company Schlumberger. He later worked as a sales man-


8

ager at software maker SAP and Senior Vice-President for the global energy business at Oracle. Like Fiorina, Mike Capellas was and outsider at Compaq who had hired him as CIO.

Capellas believed that Compaq’s salvation consisted in product innovation. Never a

leader in R&D, the company had thrived on improving existing technology and offering ad-vanced IT solutions at affordable prices. To succeed against giants like Dell Computer and HP, Compaq had to out- innovate the competition in its core PC business once again. Initially the new focus seemed to pay off. The newly introduced iPAQs Pocket PC, a handheld device with sleek sleeves for adding wireless communications or global-positioning capabilities, became a hot seller. Somewhat belatedly, Capellas also tired to reposition Compaq as a player in the market for internet technology, introducing Compaq’s new slogan “Everything to the Internet.”

Regarding the problems stemming from the DEC acquisition the new CEO’s attitude was

one of damage control stating that “[p]eople always want to talk about the past – was it a mistake to buy Digital? My attitude is that’s over. You don’t look back.” Instead, Capellas’s agenda in-cluded

• a comprehensive restructuring program, • filling gaps in the management team, • cleaning up Compaq’s product line to eliminate overlap, • developing a clear electronic commerce strategy, • emulating Dell and moving toward direct sales.

From introducing the iPAQ Pocket PC to declaring that Compaq will emulate IBM as a technol-ogy leader, Capellas publicly professed his belief that Compaq could once again be a dominant force in the PC business. At the same time, however, he quietly approached HP to discuss possi-ble linkups and corporate cooperation in June 2001. The Deal on the Table HP + Compaq From exploring the potential for a merger to negotiating the deal, HP and Compaq moved quickly toward the execution of the transaction. Following the deal’s announcement in Septem-ber, Fiorina, Capellas, and the top managers from the two companies began communicating their vision of the combined company to investors, employees, customers, and business partners. They shared the belief that a merger would provide the single best opportunity to strategically reposition the companies in key segments. In particular, the proposed deal would:

• accelerate companies’ current strategic repositioning and, in particular, bolster enterprise computing through strategic differentiation vis-à-vis its competitors,

• create a stronger, more balanced operating model, • improve the cost structure and, hence, profitability, • create shareholder value through synergies and growth opportunities


.

9

Strategically, the merger was meant to accelerate each company’s transformation to an “end-to-end solution” provider. Compaq’s presence in enterprise storage, retail PCs, high-end and low-end servers, and IT services together with HP’s primary strengths in printing and imag-ing, management software, high-end PCs, and Window/Unix servers could allow the combined entity to expand its IT service business with 65,000 professionals focusing on infrastructure de-sign, outsourcing, and support. Furthermore, the joined company hoped to seize additional mar-ket share from its competitors through product bundling. At the same time, its sale force of more than 15,000 should help the new firm to become the Number One in the key segments including enterprise storage, PC, window servers, and UNIX servers.

Management and shareholders knew that the integration would not be easy. According to

analyst estimates, the company would have to spend between $900 to $1,400 million to eliminate duplicative infrastructure and to lay off 15,000 employees. However, the deal was also expected to generate cost savings of at least $2.0 billion in 2003, and $2.5 billion annually thereafter. In particular, the business segments in highly competitive markets such as enterprise computing and PCs would benefit from such cost savings and could hope to return to profitability. For instance, the company predicted operating margin of 8% to 10% by 2003 (Exhibit 5) from improved op-eration efficiencies and enhanced revenue potential.

At the same time, HP and Compaq anticipated losses of about 4.9% in combined reve-

nues in 2002 and 2003 due to sales erosion, elimination of competing products, and general dis-tractions from the integration process. However, the long-run benefits from increased R&D spending, with annual investment of up to $4 billion, were hoped to lift the combined revenue well above indus try levels (Exhibit 6 & 7). Overall, management expected the merger to eventu-ally result in a company comparable to IBM with a total of 145,000 employees and annual reve-nue of $87 billion, and operating in over 160 countries (Exhibit 8).

Can It Work? By and large, investors were unimpressed by management’s vision for the new firm. The plumet-ting stock prices after the merger announcement for both companies reflected the market’s con-cerns over the deal. An open letter by institutional investor Matrix Asset Advisors to HP and Compaq dated October 10, 2001, summed up investors’ fears:

• no precedent of a successful large-cap technology mergers; • the difficulties of integrating two global firms operating in over 160 countries; • competitors’ advantages during the integration process due to management distraction

resulting in long-term loss of market share; • reduced focus on product quality and customer service in the transition phase; • sagging morale due to layoffs, restructuring, and internal jostling for midlevel and senior

management positions; • unclear accounting charge for R&D investments and no compelling technological bene-

fits from the merger; • no clear IT consulting service strategy.


10

The Founding Families Strike Back

As objections to the merger continued to be voiced, Walter B. Hewlett, an HP board member, and trustee of the William R. Hewlett Revocable Trust, a charitable foundation, publicly announced his opposition to the deal on November 6, 2001. The entities controlled by the Hewlett family would vote their 118 million shares, or 6.1% of HP stock, against the deal. This turn of events was all the more remarkable that the son of founder Bill Hewlett had earlier voted in favor of the merger at the PH board meeting that set the process into motion.

The market reaction showed how skeptical investors were of the merger as the an-

nouncement sent HP’s stock up 17.24% and Compaq’s down 5.47%. Following the announce-ment, Hewlett hired proxy solicitors and campaign manager to stage his own proxy solicitation of votes against the merger.

A day later on November 7, 2001, David W. Packard, son of co-founder David Packard,

announced his opposition to the deal and publicly backed the position of his childhood friend Walter. As a result of a lobbying campaign by the former, the Packard Foundation declared that it would vote its stake against the transaction on December 7, 2001. With the Packard entities’ controlling 227 million shares or 11.7% of HP stocks, nearly 17.8% of total HP shares were al-ready pledged against the merger.

If management is to obtain shareholders’ approval for the merger, it will need to win

about two-thirds of the remaining shareholders’ support. This largely undecided group is made of institutional shareholders holding about 55% of total share outstanding, and retail investors, mainly HP employees, holding about 25% of shares. Facing strong opposition from the founding families and the prospect of a very public and acrimonious proxy fight, the embattled manage-ment team around Fiorina decided not to abandon the deal but stepped up its offensive. The six-month proxy battle between the shareholders, mainly the founding families represented by Walter Hewlett, and HP management, in particular Carly Fiorina, was about to begin (Exhibit 9).

Hewlett vs. Hewlett Packard Which Way is the “HP Way”? Walter Hewlett criticized the proposed merger as a “bet the company” deal. His plea for voting against the merger centered on the argument that the deal will dilute HP shareholders’ stake in the lucrative imaging and printing operations and, instead, expose the company to the saturated PC market, which would account for one-third of the combined entity’s revenues and compete with Dell, the established price leader in the sector. Based upon analysts’ estimates, he alleges that the transaction represents a 16% to 39% dilution in 2003 for HP shareholders and claims that, overall, revenue risks will outweigh any cost benefits (Exhibit 10).

At the same time, Hewlett voices doubts about management’s ability to integrate two global companies in over 160 countries with vastly different business models, core competencies


.

11

and corporate strategies. In particular, the integration and restructuring phase poses the risk of a significant loss of expertise in R&D, production, and operations as the company lays off em-ployees. Also, the merger’s adverse effects on morale and career prospects might lead to additional departures of key personnel, further weakening the company.

Instead, Hewlett argues that HP should focus on its core competencies in the printer sec-

tor by investing in high margin digital photographic technology. He also suggests improving HP’s assets portfolio by a number of selective small-scale acquisitions.

Appealing David Packard’s famous dictum “To remain static is to lose ground,” HP

management aggressively questions Hewlett’s financial assumptions and is taking a radically different view of the PC market’s evolution. As it believes that the saturated PC segment is about to experience major consolidation, the merger as a first step in this process provides the com-bined HP-Compaq with renewed growth opportunities in this market. Hence, the crucial issue to HP management revolves around successful execution, not the underlying business rationale for the transaction.

Integration To counter Walter Hewlett’s arguments and blunt his attacks, senior management at both HP and Compaq began early to map out integration plans and coordinate the day-to-day running of their respective firms. As early as December 2001, HP had mapped out a full integration plan with milestones and hard financial targets, and started to regularly update analysts and investors on the integration steps and the progress made at meshing together two very different companies.

According to the master plan, HP’s and Compaq’s businesses and product lines are to be consolidated into four major groups (Exhibit 10):

• Enterprise Systems, • IT Services, • Imaging and Printing systems, and • Personal Systems.

To plan and carry out the operational aspects of the merger, the companies had estab-

lished an integration office jointly run by Webb McKinney of HP and Jeff Clark of Compaq, who was a veteran of managing the merger process as a former financial director of planning and analysis at DEC before Compaq took it over. Coordinating 23 different integration teams in various business lines, the office reports to the Integration Steering Committee chaired by Mike Capellas and Carly Fiorina. The whole effort involved more than 450 midlevel managers whose tasks ranged from making detailed proposals for the process over coordinating day-to-day busi-ness to physically integrating the firms’ IT systems, consolidating product lines and combining the supply chain.

The integration process comprises five stages meant to provide continuity from the

pre-merger to post-merger phase of the transaction:


12

• mobilization; • detailed planning; • close of planning before closing the deal; • launch development; • phase review after closing.

The very detailed and transparent nature of the effort is meant to assuage investor fears

about sloppy execution and managerial distraction. From management’s perspective, an added benefit lies in the public-relations value of such an open integration process. Aiming at convinc-ing a skeptical investor community, putting the deal execution under public scrutiny might be the best way to communicate the future direction of the combined company, show clear leadership, and transform HP and Compaq quickly and irrevocably.

In addition, HP indicated that the whole execution effort would focus on the two primary

objectives of the merger that are, in order:

• enhancing operational efficiencies • combined revenue growth.

Despite the unusually detailed information on the integration process and its progress

provided by HP’s management, the market seemed less than impressed. Throughout the proxy battle, the spread between HP’s bid in terms of its own stock and Compaq’s stock price stub-bornly remained at about 30%.

The Proxy Contest Articulating very different visions for HP, both sides tried persuade investors to vote their way on merits of their respective positions. Advocating a return to the company’s core values Walter Hewlett’s position is best characterized as “Back to the Future.” To this end, he and his advisors set up two websites “www.votenohpcompaq.com” and “www.walterhewlett.com” urging inves-tors to vote “no” on the deal.

By contrast, HP management relied on much more traditional forms of campaigning. “What if we had stopped here?” and “Invent2” were among a series of advertisements meant to promote a “yes” on the merger. As in any election campaign, the very public split between HP’s management and the founding families soon turned personal. In an open letter to HP’s 900,000 shareholders, eight pro-merger members of the company’s board painted Walter Hewlett in January 2002 as an “academic and musician” and accused him to be a “dilettante with no busi-ness experience” whose motivations and interests conflict with those of ordinary shareholders.

In February, Hewlett struck back revealing a proposed compensation package that would

have netted Fiorina and Capellas more than $115 million in combined bonuses in the event of a successful deal. The increasingly acrimonious tone of the exchange also showed that both Hew-lett and Fiorina were also fighting for their respective futures with the company. Fiorina admitted


.

13

as much when she observed that “[t]he company’s success will be my legacy. The company’s failure will be my failure, with all the predictable consequences.”

On March 5, 2002, Institutional Shareholder Services (ISS, based in Rockville, MD) gave

HP’s management a huge lift when it recommended that HP and Compaq shareholders vote for the deal. ISS provides proxy voting and corporate governance services that consist in analyzing proxy contests, financial analysis, and making vote recommendations for more than 10,000 U.S. and 12,000 non-U.S. shareholder meetings each year.

Financial analysts estimate that ISS’s advice would influence as much as 22% of HP total

share outstanding (Exhibit 10). ISS’s report on the merger was reassuring to HP’s management as it suggested that its top 10 institutional shareholders’ would support the deal as estimated throughout the campaign. In fact, even with more than 20% of HP shares publicly pledged against the merger, including the founding families’ shares and a few institutional investors’, the proxy battle is too close to call, making the outcome of the HP special shareholders’ meeting on March 19, 2002, so unpredictable. With the proxy contest too close to call, any large institutional investor’s vote could decide the outcome of the proxy battle effectively determining the fate of the merger.

DBAM’s Decision On Friday of March 14, 2002, just five days before HP shareholders’ meeting, DBAM, one HP’s larger institutional shareholders, had decided to vote its Compaq shares in favor of the merger, but its HP shares against the deal. This decision represented a break with the money manger’s usual practice to follow ISS’s recommendations in such matters. Although the decision was not publicized, the result had been discreetly communicated to Fiorina’s team. At this point, Bob Laverty did not even need to guess how.

When DBAM’s reached Fiorina on Sunday night, March 17, Carly Fiorina must have re-alized that she had made a mistake by not having presented her case to such an important share-holder earlier. But Laverty had to give her credit: she immediately tried to arrange a meeting with DBAM through her contacts in Deutsche Bank’s Corporate and Investment Bank, Robert Thornton.

When contacted by HP on Monday 18, 2002, Thornton called Dean Barr, Global Chief Investment Officer of Deutsche Bank’s Private Client Asset Management division, who agreed to have a meeting with Fiorina on the condition that Walter Hewlett be also given the opportunity to present his case to DBAM’s PWG. The video-conference meetings were scheduled for Thurs-day, March 19, before the HP’s shareholders meeting at 8:00 a.m. pacific time: DBAM would hear from Hewlett at 6:30 a.m., and Fiorina at 7:00 a.m.

Suddenly, the voice of Barr breaks through to Laverty bringing him instantly back to the

presence. “Remember, our duty to the clients is to make investment decisions in their best inter-ests,” he continued, “With that, I am going to ask everyone to reconsider our vote based on all


14

the information we have accumulated over the past six months. I want to make sure you have all the evidence and facts and this is why this meeting is taking place.”

Again, Laverty takes a discreet look at his watch with Barr’s words echoing in his mind.

It is 8:45 a.m. in Cupertino, California. The PWG will need to make its final decision by 10:00 a.m. West Coast time, when the polls on the proxy vote are scheduled to close. Laverty quickly glances at Thornton who is uneasily waiting for the five officers to end their deliberations and to re-vote DBAM’s shares, hopefully in favor of the merger. But should the PWG vote for the merger? If so, can HP-Compaq managers execute it as they promise? What if they fail? What if the PWG votes against the deal? As so often in asset management, it is coming down to a judg-ment call and the time is now.


.

15

Exhibit 1 Financial Highlights

Information: Before 09/04/01 Hewlett-Packard Compaq NYSE Ticker HWP CPQ 52 Week Range ($) 22.61 ~ 60.28 12.25 ~ 34.17 Market Cap ($b) 44.46 21.47 Shares Outstanding ($m) 1,939 1,753

Source: HWP 10Q 06-13-01/CPQ 10Q 07-26-01

Exhibit 2A Consolidated Hewlett-Packard Income Statement ( $ million)

2001* 2000 1999 1998 1997

Net revenues Products 37,498 41,446 36,015 33,585 36,672 Services 7,728 7,336 6,355 5,834 6,223 Total net revenues 45,226 48,782 42,370 39,419 42,895

Costs and expenses Cost of products sold 28,370 29,727 25,305 24,044 24,217 Cost of services 5,104 5,137 4,415 3,746 4,102 R&D 2,670 2,646 2,440 2,380 3,078 Selling, general & administrations 7,643 7,383 6,522 5,850 7,159 Total costs and expenses 43,787 44,893 38,682 36,020 38,556

Earnings from operations 1,439 3,889 3,688 3,399 4,339 Interest income and other, net 171 993 708 530 331 Interest expenses (455) 257 202 235 215 Litigation settlement (400) (Losses) gains on divestitures (53) Earnings before taxes 702 4,625 4,194 3,694 4,455 Provisions for taxes (25%) 78 1,064 1,090 1,016 1,336 Net earnings from continuing operations 624 3,561 3,104 2,678 3,119

Net earnings from discontinued operations 136 387 267 0 Other losses and earnings (216) Net earnings 408 3,697 3,491 2,945 3,119

* Services revenues includes a financing income of $403; cost of services includes a financing interest of $234; sell-ing, general & administrations includes a restructuring charges of $384; Other losses and earnings includes an extraor-dinary item of $56 and a cumulative effect of change in accounting principle of ($272)

Source: HWP 10K 2002/2001 filings


16

Exhibit 2B Consolidated Hewlett-Packard Statement of Cash Flow ( $ million)

2001 2000 1999 1998 1997 Cash flow from operating activities

Net earnings from continuing operation 408 3,561 3,104 2,678 3,119 Depreciation and amortization 1,369 1,368 1,316 1,377 1,556 Gains from divestitures 53 (212) (27) Deferred taxes on earnings (970) (689) (171) (1,101) (232) Tax benefit on employee stock options 16 495 289 157 Changes in assets and liabilities Accounts and financing receivables 566 (1,312) (1,637) (1,100) (993) Inventory 1,096 (845) (171) 630 (279) Accounts payable (1,249) 1,544 751 61 775 Taxes on earnings (195) 175 (639) 1,200 (63) Other current assets and liabilities 362 (282) 330 731 237 Other, net (4) (343) (76) 154 201 Net cash provided by operating activities 3,460 3,096 4,760 4,321

Cash flows from investing activities Investment in property, plant and equipment (1,527) (1,737) (1,134) (1,584) (2,338) Disposition of property, plant and equipment 447 420 542 260 333 Purchases of investments (434) (1,131) (1,015) (4,059) (5,213) Maturities and ales of investments 742 1,004 1,063 4,834 4,158 Net proceeds from divestitures 117 448 35 89 Other, net (130) (119) (148) 48 Net cash used in investing activities (1,126) (628) (608) (3,012) Cash flows from financing activities (Decrease) increase in notes payable and short-term borrowings 303 (1,297) 2,399 (734) (1,194)

Issuance of long-term debt 904 1,936 240 223 1,182 Payment of long-term debt (290) (474) (1,047) (573) (273) Issuance of common stock under employee stock plans 354 748 660 467 419 Repurchase of common stock (1,240) (5,570) (2,643) (2,424) (724) Dividends (621) (638) (650) (625) (532) Net case used in financing activities (5,295) (1,041) (3,666) (1,122)Net case provided by (used in) discontinued op-erations 965 (62) 488

(Decrease) increase in cash and cash equivalents 782 (1,996) 1,365 974 187 Cash and cash equivalents at beginning of period 3,415 5,411 4,046 3,072 2,885 Cash and cash equivalents at end of period 3,415 5,411 4,046 3,072 HWP 10K 2002/2001/2000 filing


.

17

Exhibit 2C Consolidated Hewlett-Packard Balance Sheet ( $ million)

2001 2000 1999 1998 1997 Assets

Current assets Cash and cash equivalents 4,197 3,415 5,411 4,046 3,072 Short-term investments 139 592 179 21 1,497 Accounts receivable, net 4,488 6,394 5,958 6,232 6,142 Financing receivables, net 2,183 2,174 1,889 1,520 1,123 Inventory 5,204 5,699 4,863 6,184 6,763 Other current assets 5,094 4,970 3,342 3,581 2,350 Total current assets 21,305 23,244 21,642 21,584 20,947 Property plant and equipment, net 4,397 4,500 4,333 6,458 6,312 Long-term investments and other assets 6,882 6,265 5,789 5,731 4,490 Net assets of discontinued operations 3,533 Total assets 32,584 34,009 35,297 33,773 31,749

Liabilities and Stockholders' equity Current liabilities Notes payable and short-term borrowings 1,722 1,555 3,105 1,245 1,226 Accounts payable 3,791 5,049 3,517 3,203 3,185 Employee compensation and benefits 1,477 1,584 1,287 1,768 1,723 Taxes on earnings 1,818 2,046 2,152 2,796 1,515 Deferred revenues 1,867 1,759 1,437 1,453 1,152 Other accrued liabilities 3,289 3,204 2,823 3,008 2,418 Total current liabilities 13,964 15,197 14,321 13,473 11,219 Long-term debt 3,729 3,402 1,764 2,063 3,158 Other liabilities 938 1,201 917 1,218 1,217 Stockholders' equity Preferred stocks, $0.01 par value Common stock, $0.01 par value 19 19 20 10 1,187 Additional paid-in capital 200 Retained earnings 13,693 14,097 18,275 16,909 14,968 Accumulated other comprehensive income 41 93 Total stockholders' equity 13,953 14,209 18,295 16,919 16,155 Total liabilities and stockholder's equity 32,584 34,009 35,297 33,673 31,749 HWP 10K 2002/2001/2000 filing


18

Exhibit 3A Consolidated Compaq Income Statement ( $ million)

2001 2000 1999 1998* 1997 Revenue

Products 26728 35506 31842 27372 24122 Services 6826 6716 6623 3797 462 Total revenue 33554 42222 38465 31169 24584

Cost of sales Products 21536 27624 25263 21383 17500 Services 4906 4793 4535 2597 333 Total cost of sales 26442 32417 29798 23980 17833 Selling, general and administrative expense 5328 6044 6341 4978 2947R&D 1305 1469 1660 1353 817Restructuring and related activities 742 -86 868 393 Merger-related costs 44 44Purchased in-process technology 3196 208Other (income) expense, net 466 1503 -1154 -69 -23Income (loss) before income taxes -773 875 952 -2662 2758

Provision for income taxes (30%) -210 280 365 81 903Income (loss) before cumulative effect of ac-counting change -563 595 569 -2743 1855Cumulative effect of accounting change, net of tax -222 -26 Net income (loss) -785 569 569 -2743 1855* 1998 results reflect the acquisition of Digital in June 1998 CPQ 10K 2002 and 2001 filings


.

19

Exhibit 3B Consolidated Compaq Statement of Cash Flow ( $ million)

2001 2000 1999 1998 1997 Cash flows from operating activities Net income (785) 569 569 (2,743) 1,855 Cumulative effect of accounting change, net of tax 222 26 Depreciation and amortization 1,377 1,407 1,402 893 545 Provision for bad debts 19 Gain on sale of investments (194) (278) (126) Impairment charge for investments and related assets 613 1,756 Gain on sale of businesses (1,182) Restructuring and related activities 742 (86) 868 393 202 Purchase in-process technology 3,196 208 Deferred income taxes and other (243) 252 147 (53) Change in operating assets and liabilities, net of effects of acquired businesses Receivables 1,297 (1,946) 185 (1,736) 614 Inventories 645 (72) (97) 857 (335) Income taxes payable (319) Accounts payable (319) (22) 135 589 756 Other assets and liabilities (1,873) (835) (598) (518) 143 Net cash provided by operating activates 1,482 771 1,303 878 3,688 Cash flows from investing activities Capital expenditures, net (927) (1,133) (1,185) (600) (729) Proceeds from sale of investments 370 292 149 3,134 Purchase of investments (122) (539) (89) (2,405) (Increase) decrease in short-term investments 636 (636) 344 Acquisitions of businesses, net of cash acquired (370) (517) (1,413) (268) Other, net (276) (117) (191) (798) (31) Net cash used in investing activities (955) (1,231) (2,469) (2,467) (299)Cash flows from financing activities Increase in short-term borrowings, net 706 258 453 Increase in long-term borrowings 300 575 Issuance (repayment) of long-term debt (788) (293) Common stock transactions, net 23 Issuance of common stock for stock options 245 308 183 188 Treasury stock purchases (118) (673) (276) Tax benefits associated with stock options 156 Dividends to stockholders (169) (170) (136) (95) Payment to retire Digital preferred stock (400) Other financing activities (18) (37) Net cash provided by (used in) financing activities 964 298 (176) (878) 14 Effect of exchange rate changes on cash/cash equivalents (186) 271 (83) 140 7 Net increase (decreae) in cash and cash equivalents 1,305 109 (1,425) (2,327) 3,410 Cash and cash equivalents at beginning of period 2,569 2,666 4,091 6,418 3,008 Cash and cash equivalents at end of period 3,874 2,775 2,666 4,091 6,418


20

Exhibit 3C Consolidated Compaq Balance Sheet ( $ million)

2001 2000 1999 1998 1997 Assets

Current assets Cash and cash equivalents 3,874 2,569 2,666 4,091 6,418 Short-term investment 636 344 Trade accounts receivable, net 4,623 6,715 5,622 6,998 2,891 Lease and other account receivable 1,881 1,677 1,063 2,005 1,570 Inventories 1,402 2,161 2,008 1,602 595 Other assets 1,498 1,989 1,854 471 199 Total current assets 13,278 15,111 13,849 15,167 12,017

Property, plant and equipment, net 3,199 3,431 3,249 2,902 1,985 Other assets, net 7,212 6,314 10,179 4,982 629 Total assets 23,689 24,856 27,277 23,051 14,631 Liabilities and stockholders' equity Current liabilities Borrowings 1,692 711 453 Accounts payable 3,881 4,233 4,380 4,237 2,837 Deferred income 1,181 1,089 972 282 195 Accrued restructuring costs 1,110 Other liabilities 4,379 5,516 6,033 5,104 2,170 Total current liabilities 11,133 11,549 11,838 10,733 5,202

Long-term debt 600 575 Postretirement and other postemployment benefits 839 652 605 545 Commitments and contingencies 422 Stockholders' equity Preferred stock, $0.01 par value Common stock, $0.01 par value 8,307 8,039 7,627 7,270 2,096 Retained earnings 4,393 5,347 4,948 4,465 7,333 Accumulated other comprehensive income (132) 27 2,919 Treasury stock (1,451) (1,333) (660) (384) Total stockholders' equity 11,117 12,080 14,834 11,351 9,429

Total liabilities and stockholders' equity 23,689 24,856 27,277 23,051 14,631 CPQ 10K 2002/2001/2000 filings


.

21

Exhibit 4 HP-Compaq Cost Saving and Revenue-Loss Attribution for 2004 Cost Savings Category EBIT Impact ( $ m) Administration New IT investment 200 Labor 425 COGS Purchasing 300 Server manufacturing 100 PC Direct 100 Cost of Service 100 Sales Management 475 R&D 425 Indirect purchasing 250 Marketing 125 Total Base Synergies 2,500 Revenue Loss Category % Revenue Loss in Category % of Total Revenue Loss Home PCs 18% 35% Business PCs 8% 29% Appliances 7% 2% UNIX Servers 11% 16% NT Servers 6% 13% Storage 5% 7% Total Impact on Expected Revenues 9.5% Total Impact on Overall Revenues 4.9% Source: Hewlett-Packard 425 Filing 12-19-01

Hewlett-Packard and Compaq FIN-673-001 Can big mergers work?

22

Exhibit 5 Detailed HP-Compaq Operating Model

Category Pro Forma Combined Long-term Target Revenue growth -- -- Gross margin 24.9% 25%~27% Operating expenses 20.1% 15%~17% Operating margin 4.8% 8%~10% Net Margin 4.1% 6%~7% Source: Compaq Investor Presentation 09-04-01 Exhibit 6 Selected Enterprise & Hardware Industry Growth Forecast

Category Growth Rate Enterprise Computing 10% Personal Computers 5% Service 15% Printers 10% Source: Deutsche Bank HWP Research Report 09-19-01 Exhibit 7 HP-Compaq R&D Breakdown HP Compaq

Itanium Server Design ü ü

High Performance Server Design ü ü

Super Computing Applications ü

Fault Tolerant Hardware & Software ü

Enterprise-class Unix ü

Partitioning & Workload Management ü ü

Data Center Solution ü ü Source: Hewlett-Packard 425 Filing 12-19-01


.

23

Exhibit 7A Pro Forma Condensed HP-Compaq Income Statement ( $ m) Year ended on October 31, 2001

Revenue

Product 67,332

Services 13,830

Financing income 571

Total revenues 81,733

COGS

Cost of products sold 51,965

Cost of service 9,588

Financing interest 348

R&D 4,060

Selling, general and administration 12,762

Restructuring and related charges 1,040

Amortization of intangible assets 612

Amortization of good will 191

Total cost and expenses 80,566

Earnings from operation 1,167

Interest, and other, net (2,853)

Earnings (loss) from continuing operating before taxes (1,686)

Taxes (26%) (660)

(1,026) Net earnings (loss) from continuing operating

Source: Joint Proxy Statement 02-06-02


24

Exhibit 7B Pro Forma Condensed HP-Compaq Balance Sheet ( $ m), Year ended on October 31, 2001

Assets

Current assets 8,137

Cash and cash equivalents 139

Short-term investments 9,268

Accounts receivable, net 3,259

Inventory 6,836

Other current assets 8,385

Total current assets 36,024

Property , plant and equipment, net 8,741

Long-term investments and other assets 7,984

Amortizable intangible assets, net 4,189

Goodwill and intangible assets with indefinite lives 12,250

Total assets 69,188

Liabilities and stockholders' equity

Current liabilities

Notes payable and short-term borrowings 3,223

Accounts payable 7,410

Deferred revenue 2,817

Other accrued liabilities 11,227

Total current liabilities 24,677

Long-term debt 4,329

Other liabsilit 3,379

Total stockhoders' equity 36,803

Total liablities and stockholders' equity 69,188

Source: Joint Proxy Statement 02-06-02


.

25

Exhibit 8 HP Proxy Contest Timeline

1999

07.1999 Carleton S. Fiorina becomes CEO of Hewlett Packard

Michael D. Capellas becomes CEO of Compaq

2001

06.22.2001 Fiornia and Capellas began negotiations of possible business combination

Market rumored the merger between Hewlett-Packard and Compaq

09.03.2001 Hewlett-Packard and Compaq announced the merger

10.18.2001 Matrix Asset Advisors Inc, a Hewlett-Packard shareholder, first denounced the deal

11.06.2001 Hewlett family announced to vote against the merger

11.07.2001 David. W. Packard publicly backed the Hewlett family’s decision

11.09.2001 Walter Hewlett hired proxy solicitation company and initiated the proxy contest

11.12.2001 Hewlett-Packard hired proxy solicitation company to engage in the proxy contest

11.16.2001 Walter Hewlett filed solicitation material with the SEC

Walter Hewlett filed a written report to the trustees, which containing merger analysis

12.05.2001 Walter Hewlett filed solicitation material containing financial analysis of the merger

12.07.2001 The David and Lucile Packard foundation announced to vote against the merger

12.19.2001 HP filed solicitation material containing integration plan with the SEC

12.27.2001 Walter Hewlett filed a preliminary proxy statement with the SEC

2001

02.19.2002 Walter He wlett filed alternative plan with SEC

09.03.2002 Hewlett-Packard and Compaq announced the merger

03.05.2002 Institutional Shareholder Services (ISS) recommended shareholders to vote for the deal

03.06.2002 FTC ruled Hewlett-Packard and Compaq merger may proceed

03.19.2002 Hewlett-Packard special shareholders’ meeting

03.20.2002 Compaq special shareholders’ meeting


26

Exhibit 9 Walter Hewlett’s Dilution Estimation on HP Shareholders

Sources Accretion/Dilution

Bank of America

Management Case1 12%

Base Case2 (19%)

Worse Case3 (32%)

Assumptions: 1 No revenue loss and $2.1billion in cost savings 2 7.5% revenue reduction and $1.8 billion in cost savings 3 10% revenue reduction and $1.6 billion in cost savings

Morgan Stanley

Management Case1 8%) 12%

Base Case2 (16% (1%)

Worse Case3 (39%) (12%)

Assumptions: 1 5% discount to combined revenues and $2.0 billion and $2.4 billion cost saving in 2003 and 2004 re-

spectively 2 10% discount to combined revenues, 50 basis points decrease in combined gross margin, and $2.4 bil-

lion cost savings in 2003 and 2004 respectively 3 15% discount to combined revenues, 100 basis points decrease in combined gross margin , and $2.4 bil-

lion cost savings in 2003 and 2004 respectively


.

27

Exhibit 10A Hewlett-Packard Consolidated Segment Financial Data 2001 2000 1999 1998Imaging and printing systems Net revenue from external customers 19,447 20,471 18,512 16,661 Intersegement net revenue 5 38 48 Total net revenue 19,447 20,476 18,550 16,709 Earnings (loss) from operations 1,987 2,746 2,335 2,043 Depreciation and amortization expenses 227 344 494 425 Assets 7,571 7,150 6,831 Capital expenditure 309 140 452 Inventory* 3,495 1,665 2,810 Computing systems Net revenue from external customers 17,482 20,694 17,256 16,851 Intersegement net revenue 289 401 558 464 Total net revenue 17,771 21,095 17,814 17,315 Earnings (loss) from operations (450) 960 850 480 Depreciation and amortization expenses 82 93 96 189 Assets 6,686 5,846 5,372 Capital expenditure 99 96 88 Inventory* 1,337 1,665 1,539 IT services Net revenue from external customers 7,599 7,086 6,191 5,613 Intersegement net revenue 43 64 72 Total net revenue 7,599 7,129 6,255 5,685 Earnings (loss) from operations 342 634 575 748 Depreciation and amortization expenses 508 450 415 404 Assets* 8,455 7,100 5,834 Capital expenditure* 779 544 493 Inventory** 337 377 336 All others Net revenue from external customers 1,010 1,230 880 766 Intersegement net revenue 69 6 7 Total net revenue 1,010 1,299 886 773 Earnings (loss) from operations (321) (103) (71) (5)Depreciation and amortization expenses 14 11 4 12 Assets* 446 250 275 Capital expenditure* 3 1 10 Inventory** 35 182 178 Total segments


28

Net revenue from external customers 45,538 49,481 42,839 39,891 Intersegement net revenue 289 518 666 591 Total net revenue 45,827 49,999 43,505 40,482 Earnings (loss) from operations 1,558 4,237 3,689 3,266 Depreciation and amortization expenses 831 898 1,009 1,030 Assets 23,158 20,346 18,312 Capital expenditure* 1,190 781 1,043 Inventory** 5,204 5,699 4,863

* The categories are not listed in 2001 10K.

**The category is derived from 2001 10K, which was not shown in 2000 10K.


.

29

Exhibit 10B Compaq Consolidated Segment Financial Data

2001 2000 1999 1998*

Enterprise computing

Revenues 10,699 14,253 12,947 10,498

Operating income 163 1,656 674 948

Compaq global services

Revenue 7,789 7,483 7,162 3,990

Operating income 1,062 884 1,148 776

Commercial personal computing

Revenue 11,846

Operating income (46)

Access/Consumer*

Revenue 15,193 20,624 18,128 4,932

Operating income (587) 145 (437) 183

Other

Revenue (127) (138) (41) (97)

Operating income 1 (43) (289) (115)

Total

Revenue 33,554 42,222 38,196 31,169

Operating income 639 2,642 1,096 1,746

* In 2001, Compaq realigned its businesses and combined its commercial personal computing and consumer

into access. Certain expenses and earnings were also re-allocated among these reportable segments.


30

Exhibit 10C HP-Compaq Revenue Breakdown

Combined Entity

Imanging &

printing22%

Access33%

Enterprise

26%

Service19%

Compaq

Access48%

Enterprise

34%

Service18%

HP

Imaging&

printing41%

Access21%

Enterprise19%

Service19%

Exhibit 11 HP Stockownership Breakdown

Category Percentage

Institutions 56.7%

Retail 25.5%

Packard Foundations 11.7%

Hewlett Entities 6.1%

Management 0.1%

Total 100%

Source: Morgan Stanley HWP Report 03-06-02

Source: Morgan Stanley HWP Report

Hewlett vs. Hewlett-Packard: HP’s Takeover of · PDF fileon the proposed HP-Compaq...

Documents

Transcript of Hewlett vs. Hewlett-Packard: HP’s Takeover of · PDF fileon the proposed HP-Compaq...