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UPDATE: HP to Gobble Compaq in $21B Stock Swap; New Company to Rival Sun, IBM

NEW YORK, Sept. 4 - Computer giant Hewlett-Packard plans to acquire rival Compaq in a deal valued at $21 billion that will likely create a more agile competitor to Sun Microsystems’ and IBM’s life science efforts, the companies confirmed on Tuesday.

The new company, which will retain the Hewlett-Packard name and Palo Alto, Calif., headquarters, will be home to roughly 145,000 employees and generate some $87 billion in annual revenue.

It was too early to tell what direct effect the acquisition would have on Compaq’s life science division. “We have no idea at the moment. This is so new that I don’t think the details have yet been worked out at that level,” said Lionel Binns, Compaq’s world life and materials group manager. “As far as I’m aware, everything is at the highest level at the moment.”

A Compaq spokesman said that further details would not be made available until the deal is wrapped up, which is scheduled for the first half of 2002.

“I believe this partnership is a foundation to change the industry,” Michael Capellas, Compaq’s current president and CEO, said in a news conference on Tuesday.

“It makes us a more effective competitor, and an even more effective partner. If you don't believe it, watch,” added Carleton S. Fiorina, Hewlett-Packard’s current chairwoman and president.

Fiorina will become CEO of the new company while Capella will become its president.

Compaq’s decision in July to switch from the Alpha integrated circuit chip to the Itanium processor may have served to foreshadow its acquisition by Hewlett-Packard, a Compaq manager said in an interview on Tuesday.

The switch to the new platform “lined us up really nicely” with Hewlett-Packard, whose “business future lies with Itanium,” according to the manager, who spoke on the condition of anonymity. Hewlett-Packard developed the Itanium platform with Intel.

“It is interesting that we lined up on the same chip architecture and then (Hewlett-Packard) announced (its) purchase” of Compaq, the manager added.

In July , Compaq announced plans to sell its Alpha chip technology to Intel, and to eventually standardize using the Itanium chip. The decision "has been very warmly accepted by the life science market at large," Binns, Compaq’s world life and materials group manager, said at the time. 

The boards of both firms have given their blessing to the deal. The acquisition now rests on formal approvals from shareholders as well as from US and European antitrust regulators.

It was unclear whether either company would be required to divest any holdings, but analysts believe the size of the new firm may induce antitrust regulators to have a thorough look.

ADDITIONAL LAYOFFS

Capella said in the press conference that the new company would likely cut some 15,000 jobs as it struggles to trim $2.5 billion in costs over several years. Again, neither company would say at this time if those layoffs would spill over to Compaq’s life-science division. (Hewlett-Packard has “a one-man life-sciences division,” according to a source familiar with the Compaq deal. Hewlett-Packard would not immediately confirm or deny this. That individual is currently vacationing, according to a voicemail greeting.)

Houston, Texas-based Compaq, which currently is the second-largest computer firm in the world and a premiere player in the genomics industry, had previously announced plans to cut 6,000 jobs. Hewlett-Packard, which is ranked fourth in the world in personal computer sales, had also recently said it would lay off 8,500 workers.

Under the terms of the merger, Compaq shareholders would receive 0.6325 shares of Hewlett-Packard for each share owned. The deal was originally priced at $25 billion, but the decline in Hewlett-Packard’s share prices on Tuesday brought its current value down to slightly more than $21 billion.

Shares Hewlett-Packard fell $3.39, or 14.6 percent, to $19.82, representing their lowest level since 1996. Shares in Compaq, meanwhile, fell 58 cents, or 4.7 percent, to $11.77. Both companies trade on the New York Stock Exchange.

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