Filed by Hewlett-Packard Company Pursuant to Rule 425
Under the Securities Act of 1933
And Deemed Filed Pursuant to Rule 14a-12
Under the Securities Exchange Act of 1934
Subject Company: Compaq Computer Corporation
Commission File No.: 1-9026
This filing relates to a planned merger (the "Merger") between Hewlett-Packard
Company ("HP") and Compaq Computer Corporation ("Compaq") pursuant to the terms
of an Agreement and Plan of Reorganization, dated as of September 4, 2001 (the
"Merger Agreement"), by and among HP, Heloise Merger Corporation and Compaq. The
Merger Agreement is on file with the Securities and Exchange Commission as an
exhibit to the Current Report on Form 8-K, as amended, filed by Hewlett-Packard
Company on September 4, 2001, and is incorporated by reference into this filing.
SETTING THE RECORD STRAIGHT
Mr. Hewlett's press release merely recycles prior assertions in an attempt to
breathe life into arguments that have been previously discredited.
A detailed analysis filed by Hewlett-Packard Company with the SEC on December
19, 2001 discusses in detail why this merger creates significant shareowner
value and highlights many of the central flaws in Mr. Hewlett's financial
presentation.
HP's analysis incorporates careful consideration of the costs required to
acquire Compaq Computer Corporation, as well as the impact of potential revenue
loss, potential cost savings and potential integration costs. The HP analysis
also reflects detailed, business-by-business analysis involving highly
experienced management teams and their business, legal and financial advisors.
The HP/Compaq merger will create near and long-term shareowner value for the
following reasons:
o HP conservatively anticipates $2.5 billion of annual pretax cost savings by
FY2004, adding $5 and $9 to the net present value of each HP share.
o HP expects the merger to facilitate broad improvement in financial
performance across all key business segments leading to a more balanced,
profitable combined company. For example, overall operating margins are
expected to improve from 5% to 9% by FY2003, and the Enterprise and Access
segments, which posted operating losses in fiscal 2001, are reasonably
expected to show significant margin improvements, achieving 9% and 3%
operating margins, respectively, by FY2003.
o The merger is expected to lead to substantial accretion to HP's earnings:
13% accretion in first full year (FY03) earnings per share.
o HP's financial case is based on credible, experience-tested, detailed
analysis. For example, the revenue forecast reflects conservative
assumptions on revenue loss, is based on detailed segment analysis and
assumes no revenue upside.
Illustrative of the flaws in Mr. Hewlett's argument are several statements in
his press release:
MR. HEWLETT'S ASSERTION: That the transaction will be dilutive.
THE FACTS: Based on carefully prepared financial analysis, HP reasonably expects
the value of its stock to increase. In the first full year of combined
operations (FY2003), the transaction is expected to be 13% accretive to HP EPS.
As cost savings reach full realization in FY2004, the transaction is expected to
be more accretive to EPS thereafter. Mr. Hewlett's counterclaims are unreliable
because they are based on faulty assumptions as illustrated below.
MR. HEWLETT'S ASSERTION: That the $2.5 billion in annual cost savings is
unrealistic and the calculation of $5-$9 per share present value of the cost
savings is misleading.
THE FACTS: To the contrary, HP's cost savings estimates are, if anything,
conservative. HP, working closely with Compaq, reviewed detailed cost saving
opportunities in purchasing, administration, sales management and other areas.
The present value of these cost savings, net of the revenue loss is $5 and $9
per share, assuming price/earnings multiples ranging between 15X (creating the
$5) and 25X (creating the $9). Mr. Hewlett's press release shows that HP's P/E
multiple is 23X, suggesting HP's multiple assumptions are reasonable to
conservative. The expected benefits are based on detailed analysis and
integration work, not generalization, and will drive significant value for HP
shareowners.
MR. HEWLETT'S ASSERTION: That HP's revenue loss assumptions are unrealistic.
THE FACTS: HP assumptions regarding revenue loss reflect an in-depth,
product-by-product analysis. HP's analysis assumes 18% revenue loss in Home PCs,
8% in Consumer PCs, 7% in Appliances, 11% in UNIX servers, 6% in NT servers and
5% in Storage, which leads to cumulative revenue loss of 10% in exposed
Enterprise and Access segments, 5% overall revenue loss. These estimates reflect
the judgment of operating managers with input from McKinsey & Co. By contrast,
the $8 billion of projected revenue loss that Mr. Hewlett's filing references
would imply an unrealistically high 18% revenue loss on business segments HP
considers exposed to merger-related revenue loss.
MR. HEWLETT'S CLAIM: In preparing financial analysis relating to the merger, a
25% contribution margin should be applied.
THE FACTS: As noted in HP's filing of December 19, 2001, HP believes that Mr.
Hewlett's arguments regarding the contribution margin on revenue loss are
significantly overstated. HP performed a careful, business-by-business analysis
to estimate the proper contribution margin to apply to
each business. The 12% contribution margin HP applied reflects a blending of the
various contribution margins by product and segment. These estimates reflect the
judgment of operating managers, with input from McKinsey & Co and Accenture. By
contrast, the analysis of the "independent analyst" cited in Mr. Hewlett's
argument, does not reflect product-by-product level of product overlap and
profitability. Given that revenue loss is expected to be "concentrated in PCs"
(quoted from Mr. Hewlett's SEC filing) which have comparatively low contribution
margins far below 25%, a weighted average of 25% is implausible to impossible.
MR. HEWLETT'S ASSERTION: That HP has failed to acknowledge the risks of the
integration.
THE FACTS: HP fully appreciates the challenge of integration and has
consistently acknowledged that the integration process is complex, requiring
extensive program management, continuous oversight and careful execution.
Members of HP's board and management team have overseen multiple large mergers
as well as other significant complex transactions. As a result, the team began
addressing integration plans and challenges prior to even completing the
agreement to merge. The resulting program has dedicated two senior executives to
full-time oversight, with a team of more than 450 employees dedicated to
integration planning. This team is currently in its third, and final, phase of
integration planning. At the same time, both the management teams of HP and
Compaq have beaten expectations in their most recently reported quarters,
demonstrating their ability to keep the businesses focused during the merger
even with the distractions created by Mr. Hewlett.
In sum, this transaction will be a source of substantial value creation over
both the near and long-term. HP intends to review the filing in detail and will
provide supplemental response as appropriate.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risks,
uncertainties and assumptions. If any of these risks or uncertainties
materializes or any of these assumptions proves incorrect, the results of HP and
its consolidated subsidiaries could differ materially from those expressed or
implied by such forward-looking statements.
All statements other than statements of historical fact are statements that
could be deemed forward-looking statements, including any projections of
earnings, revenues, synergies, accretion or other financial items; any
statements of the plans, strategies, and objectives of management for future
operations, including the execution of integration and restructuring plans and
the anticipated timing of filings, approvals and closings relating to the Merger
or other planned acquisitions; any statements concerning proposed new products,
services, developments or industry rankings; any statements regarding future
economic conditions or performance; any statements of belief and any statements
of assumptions underlying any of the foregoing.
The risks, uncertainties and assumptions referred to above include the ability
of HP to retain and motivate key employees; the timely development, production
and acceptance of products and services and their feature sets; the challenge of
managing asset levels, including inventory; the flow of products into
third-party distribution channels; the difficulty of keeping expense growth at
modest levels while increasing revenues; the challenges of integration and
restructuring associated with the Merger or other planned acquisitions and the
challenges of achieving anticipated synergies; the possibility that the Merger
or other planned acquisitions may not close or that HP, Compaq or other parties
to planned acquisitions may be required to modify some aspects of the
acquisition transactions in order to obtain regulatory approvals; the assumption
of maintaining revenues on a combined company basis following the close of the
Merger or other planned acquisitions; and other risks that are described from
time to time in HP's Securities and Exchange Commission reports, including but
not limited to the annual report on Form 10-K for the year ended October 31,
2000 and HP's amended registration statement on Form S-4 filed on January 14,
2002.
HP assumes no obligation and does not intend to update these forward-looking
statements.
ADDITIONAL INFORMATION ABOUT THE MERGER AND WHERE TO FIND IT
On January 14, 2002, HP filed an amended registration statement with the SEC
containing an amended preliminary joint proxy statement/prospectus regarding the
Merger. Investors and security holders of HP and Compaq are urged to read the
amended preliminary joint proxy statement/prospectus filed with the SEC on
January 14, 2002 and the definitive joint proxy statement/prospectus when it
becomes available and any other relevant materials filed by HP or Compaq with
the SEC because they contain, or will contain, important information about HP,
Compaq and the Merger. The definitive joint proxy statement/prospectus will be
sent to the security holders of HP and Compaq seeking their approval of the
proposed transaction. The amended preliminary joint proxy statement/prospectus
filed with the SEC on January 14, 2002, the definitive joint proxy
statement/prospectus and other relevant materials (when they become available),
and any other documents filed by HP or Compaq with the SEC, may be obtained free
of charge at the SEC's web site at www.sec.gov. In addition, investors and
security holders may obtain free copies of the documents filed with the SEC by
HP by contacting HP Investor Relations, 3000 Hanover Street, Palo Alto,
California 94304, 650-857-1501. Investors and security holders may obtain free
copies of the documents filed with the SEC by Compaq by contacting Compaq
Investor Relations, P.O. Box 692000, Houston, Texas 77269-2000, 800-433-2391.
Investors and security holders are urged to read the definitive joint proxy
statement/prospectus and the other relevant materials when they become available
before making any voting or investment decision with respect to the Merger.
HP, Carleton S. Fiorina, HP's Chairman of the Board and Chief Executive Officer,
Robert P. Wayman, HP's Executive Vice President, Finance and Administration and
Chief Financial Officer, and certain of HP's other executive officers and
directors may be deemed to be participants in the solicitation of proxies from
the shareowners of HP and Compaq in favor of the Merger. The other executive
officers and directors of HP who may be participants in the solicitation of
proxies in connection with the Merger have not been determined as of the date of
this filing. A description of the interests of Ms. Fiorina, Mr. Wayman and HP's
other executive officers and directors in HP is set forth in the proxy statement
for HP's 2001 Annual Meeting of Shareowners, which was filed with the SEC on
January 25, 2001. Investors and security holders may obtain more detailed
information regarding the direct and indirect interests of Ms. Fiorina, Mr.
Wayman and HP's other executive officers and directors in the Merger by reading
the amended preliminary joint proxy statement/prospectus filed with the SEC on
January 14, 2002 and the definitive joint proxy statement/prospectus when it
becomes available.
Pursuant to an engagement letter dated July 25, 2001, HP retained Goldman, Sachs
& Co. ("Goldman Sachs") to act as its financial advisor in connection with the
Merger. In connection with the engagement of Goldman Sachs as financial advisor,
HP anticipates that employees of Goldman Sachs may communicate in person, by
telephone or otherwise with certain institutions, brokers or other persons who
are shareowners for the purpose of assisting in the solicitation of proxies in
favor of the Merger. Although Goldman Sachs does not admit that it or any of its
directors, officers, employees or affiliates is a "participant," as defined in
Schedule 14A under the Securities and Exchange Act of 1934, as amended, or that
Schedule 14A requires the disclosure of certain information concerning them in
connection with the Merger, Gene Sykes (Managing Director), Matthew L'Heureux
(Managing Director), George Lee (Vice President) and Jean Manas (Vice
President), in each case of Goldman Sachs, may assist HP in the solicitation of
proxies in favor of the Merger.
Compaq and Michael D. Capellas, Compaq's Chairman and Chief Executive Officer,
and certain of Compaq's other executive officers and directors may be deemed to
be participants in the solicitation of proxies from the shareowners of Compaq
and HP in favor of the Merger. The other executive officers and directors of
Compaq who may be participants in the solicitation of proxies in connection with
the Merger have not been determined as of the date of this filing. A description
of the interests of Mr. Capellas and Compaq's other executive officers and
directors in Compaq is set forth in the proxy statement for Compaq's 2001 Annual
Meeting of Shareholders, which was filed with the SEC on March 12, 2001.
Investors and security holders may obtain more detailed information regarding
the direct and indirect interests of Mr. Capellas and Compaq's other executive
officers and directors in the Merger by reading the amended preliminary joint
proxy statement/prospectus filed with the SEC on January 14, 2002 and the
definitive joint proxy statement/prospectus when it becomes available.
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