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Hewlett-Packard and Compaq Agree to Merge, Creates $87 Billion Giant

Press release from the issuing company

PALO ALTO, Calif. and HOUSTON, Sept. 3 Hewlett-Packard Company and Compaq Computer Corporation announced today a definitive merger agreement to create an $87 billion global technology leader. The new HP will offer the industry's most complete set of IT products and services for both businesses and consumers, with a commitment to serving customers with open systems and architectures. The combined company will have #1 worldwide revenue positions in servers, access devices (PCs & hand-helds), and imaging & printing, as well as leading revenue positions in IT services, storage, and management software. The merger is expected to generate cost synergies reaching approximately $2.5 billion annually and drive a significantly improved cost structure. Based on both companies' last four reported fiscal quarters, the new HP would have approximate pro forma assets of $56.4 billion, annual revenues of $87.4 billion and annual operating earnings of $3.9 billion. It would also have operations in more than 160 countries and over 145,000 employees. Carly Fiorina, Chairman and Chief Executive Officer of HP, will be Chairman and CEO of the new HP. Michael Capellas, Chairman and Chief Executive Officer of Compaq, will be President. Capellas and four other members of Compaq's current Board of Directors will join HP's Board upon closing. "This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners,'' said Fiorina. "In addition to the clear strategic benefits of combining two highly complementary organizations and product families, we can create substantial shareowner value through significant cost structure improvements and access to new growth opportunities. 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.'' Capellas said, "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 this move, we will change the basis of competition in the industry.'' Under the terms of the agreement, unanimously approved by both Boards of Directors, Compaq shareowners will receive 0.6325 of a newly issued HP share for each share of Compaq, giving the merger a current value of approximately $25 billion. HP shareowners will own approximately 64% and Compaq shareowners 36% of the merged company. The transaction, which is expected to be tax-free to shareowners of both companies for U.S. federal income tax purposes, will be accounted for as a purchase. The transaction is expected to be substantially accretive to HP's pro forma earnings per share in the first full year of combined operations based on achieving planned cost synergies. Cost synergies of approximately $2.0 billion are expected in fiscal 2003, the first full year of combined operations. Fully realized synergies are expected to reach a run rate of approximately $2.5 billion by mid-fiscal 2004. These anticipated synergies result from product rationalization; efficiencies in administration, procurement, manufacturing and marketing; and savings from improved direct distribution of PCs and servers. Subject to regulatory and shareowner approvals and customary closing conditions, the transaction is expected to close in the first half of 2002. In connection with the transaction, both companies have adopted shareowner rights plans; information on these plans will be filed today with the Securities and Exchange Commission. The merged entity will be headquartered in Palo Alto and retain a significant presence in Houston, which will be a key strategic center of engineering excellence and product development. The new HP will be structured around four operating units that build on the companies' similar go-to-market and product development structures to provide clear customer and competitive focus. Leadership and estimated revenues (calculated by combining the two companies' trailing four reported fiscal quarters) are as follows: * A $20 billion Imaging & Printing franchise to be led by Vyomesh Joshi, currently President, Imaging and Printing Systems, of HP. * A $29 billion Access Devices business to be led by Duane Zitzner, currently President, Computing Systems, of HP. * A $23 billion IT Infrastructure business, encompassing servers, storage and software, to be led by Peter Blackmore, currently Executive Vice President, Sales and Services, of Compaq. * A $15 billion Services business with approximately 65,000 employees in consulting, support and outsourcing to be led by Ann Livermore, currently President, HP Services. The chief financial officer of the combined entity will be Robert Wayman, Chief Financial Officer of HP. The integration team will be led by Webb McKinney, currently President of HP's Business Customer Organization, and Jeff Clarke, Chief Financial Officer of Compaq. Fiorina concluded, "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. We have done comprehensive integration planning and have clear metrics to drive our success. We are committed to achieving the synergies we have identified while maintaining our competitive position and momentum in the marketplace.''

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