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.
The following is a transcript of a discussion session with HP retirees led by
Carleton S. Fiorina, HP's Chairman of the Board and Chief Executive Officer. The
discussion session also included remarks from Robert P. Wayman, HP's Vice
President, Finance and Administration and Chief Executive Officer, Richard H.
Lampman, HP's Vice President, Research and Director, HP Labs, Webb McKinney,
HP's President, Business Customer Organization, and Susan D. Bowick, HP's Vice
President and Director, Corporate Human Resources. A video and set of slides
were presented at this discussion session. A transcript of the video and the set
of slides were filed by HP with the Securities and Exchange Commission on
December 13, 2001 and December 19, 2001, respectively, 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.
HP RETIREE MEETING
CARLY: Good morning. Let me welcome you back to HP. I know we also have a
several people in an overflow room. I apologize that we were not able to fit
everyone in this room, but we do want to keep all the fire marshals happy. But
we're very delighted that all of you came this morning.
Each of you and all of you have contributed so much to this company, and so
I and some important members of our management team wanted to talk with you
about the progress we've made over the last several years, and also a bit
specifically about the Compaq merger which I know is of great interest to all of
you.
Before I get started with my remarks let me introduce a couple key members
of our management team who are also going to be speaking with you today. The way
we're going to run our program today, I'll talk for maybe 20 minutes or so. We
then have a video tape from our board of directors that I'd like to show you.
Then I'm going to ask Bob Wayman, our chief financial officer, to talk with you,
so, Bob, why don't you stand up, I know most of you know Bob.
BOB: Hello everyone! For those of you that don't know me I've been with HP for
about 32 years, started with Loveland instrument division in those days, and
well I've worked with a bunch of you in this crowd in a lot of different
capacities, and still working hard. So glad to have you all here today.
CARLY: Thanks, Bob. We'll also hear from Web McKinney, who not only today runs
our business customer organization, but is also leading our integration efforts
in the merger. So, Webb, you want to introduce yourself?
WEBB: Hi everybody! Wayman and I figured out that he's been with the company one
day longer than I have, so he's truly the senior member of the team, but I
started with F&T and it's great to see Al Bagley here, my early mentor.
[MALE VOICE]: Yeah, Bagley.
WEBB: I still get lots of free advice from Al, just so you know. And I spent 12
years at Santa Clara Division in the instrument business then moved into PC
business. I've run PC divisions, I've run the whole PC business, I've run
software businesses, and currently manage, before leading the integration effort
I was managing all of HP's business that they do with commercial customers with
business customers. So again I'd like to join Bob and Carly in welcoming you
here today.
CARLY: Great. Thanks, Webb. We also have Susan Bowick our vice president for HR.
Susan.
SUSAN: Hello everybody! And although it's called Human Resources now it is still
the personnel function which is what most of you knew us as. There must be a
trend here because I have been with HP now for just about 25 years. I also
started at Loveland instrument division and was in test and measurement for 13
years before I went to the computer and the CPO pieces of HP's business, and
I've been the head of Human Resources now as we call it at HP for about five
years.
CARLY: Great. Thanks, Susan. And finally Dick [Lampman] who head's HP labs and
since he probably won't brag on himself I'll brag on him for him before he
stands up. HP labs is now the second largest corporate research lab in the world
today. Our patent production is up two times in the last two years, and we just
completed a very successful 2001 where we are now filing patent applications at
a rate of almost ten every working day. So, Dick.
[APPLAUSE]
CARLY: Mike, we need a mike here for Dick, sorry.
DICK: Low tech approach. Anyway, no I would not have said that. But it is a good
time for HP Labs and in fact this last year we celebrated our 35th anniversary,
so something we're really proud of in terms of the impact we've had on the
company.
For me, I've been with the company about 30 years, so I guess I'm a
newcomer compared to some of these guys, and...
CARLY: Actually I'm definitely the newcomer, Dick.
DICK: ...started out in the microwave division, moved to our computer business,
and have been in HP Labs for about the last 20 years. So look forward to talking
to you later.
CARLY: Great. Thanks, Dick. And I clearly am the newbie in the crowd; I think
you all know who I am, but I want to tell you that having now been here a little
over two-and-a-half years, I came to this company because I think it is an
extraordinary institution. I think it is a company characterized not only by its
results but by its character. I think this is a company whose values are
timeless, whose corporate objectives are pragmatic and common sense. I think it
is a company that has demonstrated not only its ability to preserve its essence,
but also it has demonstrated that it can continue as all technology companies
must to change with the times. It is a company that can celebrate its past and
build the future as well, and I think it is a truly extraordinary place.
Of course HP has always been an extraordinary place because of its people.
You helped make it an extraordinary place, and it is the job of the management
team and the people of HP today to build upon your contributions, to celebrate
what you accomplished, and to continue to move this company forward.
Now Dave Packard once said something really interesting. I don't know how
many times you all have read the book, The HP Way, but I've read it now six
times, and every time I read it I find something new. And one of the things that
Dave Packard said, and
I may not get the quote exactly right, but he said, "Since we participate in
fields of advanced and rapidly changing technologies, to remain static is to
lose ground."
Before I start to talk about the Compaq merger I actually want to take you
back to before I even arrived in HP. Because this is a company that has made
bold moves throughout its history to take advantage of changing markets,
changing customer requirements, changing technology capability. Certainly that
was true when this company started in 1939 and '40, it was true when we came out
with the pocket calculator. It was true when we decided to get into the printing
and imaging business to create that business, it was true when we decided to
move into the computing business, and it was true as well when the board of this
company decided that the industry was changing and transforming again and we
needed to split into two companies, Agilent Technologies and HP. That was a bold
strategic move. But it was a move made in recognition of the fact that the
industry was transforming in fundamental ways.
When I came to HP I and the board of directors and the management team
began a process of evaluating first and foremost what is happening in the
market. What is changing that we must respond to. And there is a very
fundamental shift that you see as a result of the Internet. It had been going on
for a long time; this company had been preparing for it for a long time, but my
shorthand version of this fundamental transformation is: The
pure product era was over. This was a company that for many years built
wonderful products and we were organized to build wonderful products. And our
foundation wonderful products will always be our foundation, but fundamentally
what was going on in the industry was good products were no longer enough.
Because now customers were looking for solutions. Networks were changing
everything. Networked capabilities, distributed capabilities, content moving
over networks, these networks and distributed systems supported by open
architectures, industry standards. Things that this company has stood for, but
now those shifts were happening much more radically and rapidly.
And so early on we concluded that we needed to think differently about our
strategy. And I want to show you a chart if someone is putting up view graphs
for me someone in the room. If I could just show a couple charts. What you see
here is a depiction of the strategy that this company has been about for the
last two plus years. And it says that, it's a very simple depiction, for those
of you who perhaps can't read it let me tell you what it says. It says that
customers are looking for solutions that encompass eServices, put another way
digital content delivered as a service, digital imaging is an example of that.
They're looking for infrastructure that is always on, always reliable, always
secure. And that infrastructure is not simply a server here and storage there.
It is about servers and storage and network management capability working
together
seamlessly to produce an infrastructure that is as reliable as electricity or
water. It's there when you need it, think of the telephone system. That is what
computing infrastructure must evolve to, that reliable, that able to be taken
for granted. And finally as well a solution from a customer's point of view
involves intelligent, connected devices and environments.
And we began to think about our own devices. How do we make a printer for
example intelligent and connected. And today all of our printers are becoming
Web-enabled, that is able to connect directly to the Internet so that a printer
can access digital content from anywhere.
Now this is a strategy: services, infrastructure, intelligent connected
devices and environments. This is a strategy that only HP can execute because it
is a strategy that requires the set of capabilities that we have. But it also
requires a level of collaboration across divisions, across units, and so as we
thought about this strategy which clearly answers customer's requirements, it
gives us competitive advantage, it is something only this company can execute
well, but we needed to change some things in order to be able to deliver on this
strategy. [LAUGHTER] Is there something going on that I should know about? Let's
see is there somebody doing the Federal Express thing?
If I could have the next chart, where is this chart guy, he's kind of
mysterious. I sort of thought I'd have the machine up here as we usually do in
meetings.
Again, relatively simple chart. But this is a holistic way of describing
what we as a company have been, we as a management team, we as the people of HP
have been doing. You hear the shorthand expression sometime in the press, the
reinvention of HP. Sometimes that phrase is used in a less than flattering way,
but fundamentally what we're focused on is a strategy, how do we create
structures and processes that support that strategy.
I mentioned the fact that collaboration is key. If you're trying to build
networked capabilities, if it's important that servers and storage and software
work together, if it's increasingly important that our handheld devices and our
printers and our PCs work better together than separately, that requires a
different kind of team work, a different kind of research even than perhaps we
have always done in the past. And so our structure and our processes have to
support that.
We've looked at amplifying and changing some of our measures. So for
example one of the most important measures we have put in place here is
something we call "Total Customer Experience." To recognize the fact that every
time a customer deals with HP, whether it's with a service rep, whether it's
with the product itself, whether it's how the products come together, that adds
up to an experience that is either very good or not so
good. And we now pay ourselves on how customers feel about the experience we
provide.
I was at the consumer electronics show in Las Vegas yesterday and talked
about digital imaging and showed some of our wonderful new products, which I
hope some of you have gotten a chance to look at the product fair that we have
outside. That product fair will continue after this meeting from 11 to 12, so if
you didn't get a chance to look.
But that set of capabilities in digital imaging is all about the whole
experience, not just the camera, not just the printer, the whole experience.
And our culture and our behavior. How do we preserve what is best about
this company, and at the same time, change our behaviors in ways that are
appropriate to a changing industry environment? For example, if the industry is
changing more and more rapidly, which it is, then we have to become even quicker
and more flexible.
And I think finally in the center of this chart is our ambition. And that
is to become a winning eCompany with a shining soul where together the people of
HP invent the future. And each of the words is important. Winning. Winning as
compared to our competitors, winning as defined by our customers and our
shareowners. eCompany because this has become an eWorld. The availability of
networks, the proliferation of digital content, it is an eWorld and therefore we
must be an eCompany.
Shining soul. This is a company that is distinguished by its character. It
is a company that believes in, always has, contribution to communities as deeply
as we believe in profit. Recognizing that profit is a foundation for all of the
good works that we can do in communities around the world.
And the secret of HP has always been its employees, its people. This
company has always been inventive and innovative, and fundamentally I think this
is a company that has always believed in making the benefits of technology
accessible to all. It is a democratic place where we're talking about technology
not for the few but for the many, and it is in that accessibility of technology
that just works that employees and I believe we can change the world.
Now I go through that background because the merger with Compaq is the
culmination of a process, not the beginning of a process. It is the culmination
of two and half years of discussion about why and how can we best execute on our
strategy. I am fond of saying and have said ever since I arrived that
acquisitions are tactics not strategy. And the merger with Compaq is a tactic
that accelerates our ability to execute on this strategy. And that is why the
board and the management team are so excited about this combination and feel so
strongly about it.
So let me give you some highlights that I think are important when thought
about in the context of the strategy that
we're trying to execute against. So if I could have the next chart please.
This is tough to read so let me try, and it may be impossible to read. So
let me say a couple things. One, if you're interested in reading the detail in
the next set of charts that I'm going to show, all of these charts are part of
the public filing that we made on December 19th to the SEC. You can find it on
our Web site. So you can go through this material if you'd like at your leisure.
But fundamentally what this chart says is that standing still, if we
believe our strategy is sound, and we do, standing still has risks. In our
enterprise computing business we have a couple clear risks. First, it is
critically important in the strategy that I just outlined that we support and
are successful in all three operating systems. By three operating systems I mean
UNIX, NT, and LINUX. Why? Because customers use all three operating systems and
they expect them to be interoperable. The operating systems that support our
servers is what we're talking about here. And the reality is that we're very
strong in UNIX, by the way we just tied Sun for the number one position in UNIX,
we haven't been in that position in five years. So we have made huge progress in
our UNIX server line, and have totally reengineered that product line in the
last two years, and it's really starting to pay off.
So while we've made great progress, it's not enough. We were losing
momentum in NT, which is the fastest growing part of the OS and server market,
and LINUX continues to grow very quickly. We have to solve that problem to be
successful in enterprise computing and to execute on our strategy.
Likewise, there's a very, because we're moving now to a networked world,
connected solutions, systems integrators and what are called independent
software vendors, key partners who build infrastructure and deliver content are
now critical to our success. And we have to have enough presence in the market
and enough momentum behind our platforms to attract more of those partners to us
than to our competitors.
Today alone we do not have sufficient momentum with those partners. With
Compaq we gain huge momentum with those partners. Because with Compaq we become
number one in NT, number one in LINUX, and number one in UNIX. That's important.
Secondly, in enterprise computing storage is a huge growing opportunity. We
have a lot of great assets in storage, but the company that has the number one
position in distributed storage, which is where the future lies, is Compaq.
Our NT business today is losing money and losing momentum. And it was also
Dave Packard I think who said, "Every business has to pay its own way." So we
have to figure out a way to strengthen our enterprise computing business, it's
vital to our strategy, and improve its profitability.
Our access business, our PC business. PCs are a vital piece of our solution
going forward. Digital imaging for example, a great growth opportunity for our
imaging and printing systems business, digital imaging is made much easier, it
will be adopted faster with PCs.
And so with our PC business frankly we've have three choices: shut it down,
that would cause us to lose a lot more jobs than 15,000 between two companies
spread out over three years. We could have spun it out as some people suggested
we do. The problem is our PC business alone is not a viable entity. So if we
spun it out, it would fail.
What we need in the PC business to fix it is volume, because this is an
industry that is commoditizing, and we need the distribution capabilities that
make us cost-competitive with Dell. So we have to fix it.
And finally in our imaging and printing business, imaging and printing has
accounted for too much of the profitability of this company for too long. The
problem is imaging and printing cannot be a cash cow because you know what you
do with cash cows, you milk them, you don't invest in them. We have to invest in
imaging and printing which means our other businesses have to pay their own way.
And it also means that the growth opportunities in imaging and printing depend
upon the capabilities we have in computing and storage and servers and network
management. And that is what I demonstrated yesterday for example at the
consumer
electronics show with digital imaging, and I think what you'll see in some cases
outside here in our product fair.
So standing still has its risks. We don't fix some of our major problems
and we continue to gain too much of our profitability from imaging and printing.
If I could have the next chart please.
Again, hard to read, but what I want to show you here is for those people
who say Compaq is just about PCs, they misunderstand the facts. Let me go
through this.
How many of you know who is the number one player in super computing.
Compaq is the number one player in super computing today. They have now passed
IBM. And so we now have with this combination an incredibly powerful position at
the high end. Compaq acquired that position with Tandem, but between their
Himalaya, their fault-tolerant computing, their super computing capabilities,
and our own Superdome, we now have a very solidified position at the high end;
that's important. Because all of these wonderful new applications that we see
everyday require lots of compute power and lots of storage capability as well.
Industry standard servers, I describe the fact that our own industry
standard server business has been losing momentum and money, Compaq's is gaining
momentum and making money.
In storage, I've already talked about the fact that we have great assets in
storage, but we don't have enough assets to lead.
With Compaq we now become clearly the number one player in storage, bigger and
better than EMC. And storage is going through a massive industry change as well,
away from standalone storage capability to networked distributed storage
capability.
Services, we double the size of our services capability and support
services. Some people think support isn't very interesting, support services are
the most profitable piece of the services chain.
And finally our sales force. HP has needed to increase the number of people
who face customers everyday for as many years as I've been here for sure. We
double the size of our sales force.
When you look at this lineup what you see in enterprise computing is a
company that will have an opportunity to compete for every single customer's
business. In the enterprise we'll be number one in small and medium business and
number one in the consumer space with the full portfolio and capabilities that
customers are demanding. If I could go to the next chart, please.
Now this is something I hope you'll ask a bit more about in Q&A and Dick
can walk you through it, but in fact we are bolstering our R&D capabilities with
this combination. We will have a $4+ billion R&D budget, and Compaq brings some
really important capabilities to us particularly in the areas that you see
listed here: clustering, clustering capability is, they are leading in that
area, we're taking that clustering
capability and enhancing our own HP-UX, something our customers and our partners
had been asking us to do. Taking data centers and turning them into a utility.
Remember I mentioned water, electricity, telephones; that's where computing is
going.
Clearly in mobility in particular Compaq brings a lot of very strong
capabilities, and you see here in servers and storage as well. And so one of the
things we're doing in integration is consolidating Compaq research labs and
capabilities into HP Labs. If I could go to the next chart, please.
I'd like you to zero in, whoever is doing the focusing here, on the bottom
part of the page. Because, sorry, maybe both sides. Both sides. The two, sorry,
no the other side. There you go. Perfect. Okay. Because this is, remember I
talked about every business has to pay its own way. If you look at the, let's
see, left-hand side of that chart, what you'll see is the profit performance of
HP across our key businesses. And what you'll see is that our enterprise
computing business and our access business are losing money.
The reason profit was among the first corporate objectives is because
profit is a foundation for a lot of really important things. Profit's a
foundation for preserving jobs. Profits a foundation for affording research.
Profit's a foundation for being able to contribute to communities in meaningful
ways.
What you see on the right-hand side is what happens to our profitability
when we combine with Compaq. This is a substantial
improvement in the operating performance of this company. So it is not simply
about accelerating our strategy, although it is clearly about that. It is about
improving the profit production of this company. And improving the profit
production of this company also gives us a 5-to-9 dollar appreciation in our
stock price, which Bob Wayman will talk with you about in just a few minutes.
If I could have the last chart, if I have a last chart, I may not have a
last chart. No, that was the last chart. Okay. So I hope one of the things
that's obvious is that this merger is first the culmination of a strategic
process that the board and management team have been on for quite sometime. It
is about much more than PCs. It is about creating an even stronger entity which
can execute on the strategy that only this company can execute on, a stronger
entity in terms of R&D, a stronger entity in terms of market presence, a
stronger entity in terms of customer responsiveness and support, and a stronger
entity in terms of profit performance and cash flow.
I obviously feel strongly about it. The management team feels strongly
about it and is excited about it, and I think that'll come through when they
talk. But our board of directors is excited about it as well. So what I'd like
to do now is segue into a tape, a message from some of our board members how
they feel about the merger. So if we could go to the tape, please.
[PLAYING VIDEO TAPE APPROXIMATELY 4 MINUTES]
Okay, I'm going to ask Bob Wayman to come up and talk through a little bit
more detail on the financials. Let me also let all of you know that we will have
an edited video of this entire meeting and you'll be able to see the charts more
clearly in that edited video, and again all of the charts that we're using are
on our Web site and are part of the filing we made in mid-December. So, Bob,
take it away.
BOB: Thanks, Carly. In my 17 years as CFO I've worked for John Young, Lou Platt,
and now Carly, and there's a couple of constants in all of that. One is when you
follow them on the podium they've covered most of the material they wanted you
to cover. And you're behind schedule. So, nothing's different about today. It's
just the way it is.
I would like to start by reiterating my views of this merger. You've heard
it a bit from our board members, but I've evaluated many acquisitions over the
years, and, frankly, I consider part of my role to be to challenge them, to
point out as many of our critics do today, that many mergers don't work, and, in
fact, they don't add shareholder value as planned.
And, so, as CFO, I have challenged people from the strategic intent, from
the price we pay, from the synergies that are purported to come from this, and
so, when this came to my desk, I assumed we would spend, as we need to, a couple
of weeks looking at it, and it would be gone, because that's what my gut told me
when I started looking at this.
But, of course, you can tell now, that is not the way I've ended up. I'd
like to take you through a few of the key frames that I have looked at this
through that have convinced me that this really is different, and this really
does make sense for our shareholders, for our employees, and for our customers.
So, the first slide, please. Again, a lot of detail here. Can't really see
much, but it's a frame for me to speak from.
Carly's already covered a bit of this. At the high end, we get from Compaq
non-stop computing, something they acquired from Tandem about four years ago, a
very profitable, very secure, very technology rich piece of the business.
In the UNIX frame, yes, we're both in the UNIX business, but we have four
times the market share than what they do. Many criticize us for the overlap of
our product lines, so, yeah, they're sort of UNIX overlap, but it's four to one.
And, importantly, we're in commercial UNIX. They are in what I call
technical UNIX. They have clustering on top of their UNIX in a way that makes it
very attractive in the supercomputing space, in the CIA space, those sorts of
things.
Frankly, we don't compete with Compaq in UNIX because they made the
decision three years ago to get out of commercial UNIX and focus on technical.
Our strength is in commercial. Theirs is in technical.
I personally believe that bringing these two things together, what we're
going to see a stronger combined UNIX and
they are, in fact, going to lose less of their UNIX market share by being with
us than they would have on a stand-alone basis, because one of the issues that
their UNIX business has is, it doesn't have scale, and so it's future is not
secure. As Carly noted, it is losing money today.
I won't take you through each of the line items here, but another one. NT
or industry standard servers. Yes, we both do industry standard servers. Their
market share is four times ours. So, there's overlap, but it's not that much,
and I'll show you in a couple of slides later where I think we will see some
revenue loss, but because of the complementary nature of where we are in these
combined businesses, the revenue loss is just not what I initially thought it
was going to be without the benefit of study.
I could go on through storage and all, but some of the same principles that
I've described here in UNIX and NT apply as well in storage and some of the
other areas.
A lot of this, a lot of the synergies that I'll talk about in a moment come
from the enterprise space. It's important to understand when looking at the
overlap of our business that there is some in the way we bring our product to
market.
In the enterprise space, each company is in about 115 countries around the
world. In each of those countries, we have a country manager, we have a finance
manager, we have an HR manager, we have a channel program manager, we have a
sales
manager, etc. So when we get to the synergies, you'll see that is where we
will achieve the reduction in costs that help make this a good thing for our
shareholders.
Next chart, please. I'm not going to talk much about PCs. We'll get to it a
little bit later, but the reality is, Compaq brings something to us in the PC
space that we have been trying to achieve for a couple of years, and that is a
strong, direct PC model. This chart shows you the inventory turns in Compaq's
North America PC business, which is where they made the decision about a year
and a half or two ago to buy InaCom, a company who had direct delivery engine,
something that can compete effectively with Dell, the other key direct delivery
provider.
We have been investing in our direct delivery capability as well, but we
are behind Compaq. You can see here, in the last year, they have improved their
turns in that business from 23 turns, 23 turns of inventory per year, to 50.
They expect to be at 60 turns by this quarter. They will be announcing that, I
believe, in a couple of weeks, so they're getting very close to what Dell was
able to do. We are going to be able to move our efforts in this area, combine it
with theirs, and more quickly achieve the kind of competitiveness here with
regard to asset turns and the resultant cost structure that we need to achieve.
Next chart, please.
[end tape 1, side A, beginning side B]
BOB: (continuing) We have committed to a $2 1/2 billion run rate of synergies.
You can see some of the categories here shown. Admin and IT. Cost a good soul,
which is largely procurement synergies. Sales management. Our models assume no
reduction in sales jobs, sales quota carrying jobs. It is all in the management
structure. As I said, channel managers, country managers, this, that and the
other.
We each have them everywhere, at the country level, at the region level, at
the corporate level, but, importantly, we're going to preserve the sales
resources that we think both companies will benefit from.
R&D. There is some R&D overlap, as I indicated, in the industry standard
server arena. Certainly, somewhat in the UNIX arena. It will take a while to get
rid of that overlap in the UNIX arena, but we will get rid of it at some point
in time.
In the PC area, we are both developing both consumer and commercial PCs.
Indirect purchasing. This is purchasing of supplies and services, those
kinds of things in the marketing arena. So, a total of $2 1/2 billion of
synergies that are high content synergies.
Now, the first analysis that we did of synergies in July, we used outside
consultants to help us look at both companies and
figure out what the opportunities were, was a much larger number than this.
We made the decision to go public with the number that we were highly
confident in, and the one that we believed made a compelling case for why this
was possible. We have not included in here some additional synergies that we
believe we will achieve in the procurement arena, and we have not included in
here any revenue upsides, and there absolutely will be revenue upsides.
You say, why don't you do that? Well, as you can tell, from the market
reaction to this deal, people are skeptical of synergies. They're particularly
skeptical of revenue upside synergies, so we decided to just take it off the
table and put it in as a qualitative upside which we will charge our people with
achieving, and, therefore, will bring to the bottom line, but we are not
committed from a financial model at this point of view publicly to do so.
Next chart, please. One of the big controversies in our efforts here is
over what are the downsides of bringing these companies together? The reality
is, most analysts including Walter Hewlett, have now acknowledged that the $2
1/2 billion worth of cost synergies are probably achievable. We have so much
overlap, so much leverage, that we can get through the combined scale, that they
acknowledge we should be able to achieve that.
The argument now is over how much revenue will you lose when you bring
these two companies together? Here, you can see the
impact on the upper right hand side, some of you can see. Six categories where
we have modeled into our numbers, numbers I will show you in a moment the amount
of revenue loss that we believe could happen. Frankly, we're going to charge our
people with this not happening, something better than this to occur, but we
think to be realistic, to be conservative, what could happen?
Well, we both have home PCs or retail PC lines. In many stores, they are
the only two brands on the shelf. As we bring them together and rationalize the
brands, we will undoubtedly lose some retail PC market share. We have assumed
18% loss of the combined market share of those two companies in PCs.
Likewise, in business PCs, 8%. Appliances, 7%. UNIX servers, 11%. Let me
tell you what this number represents. Refer back to what I just said a moment
ago.
We have about four times the market share that they do. This assumes that
the HP strong commercial UNIX will not be disrupted by this merger. I don't
think there's any rational reason why it should be, but, indeed, the Compaq UNIX
could be at risk. People will wonder about what is the future of the Compaq
UNIX. As I described earlier, I think their future is actually better, but we
modeled in here 40% loss of the Compaq UNIX market share. So, 40% of their 20%
brings you to about this 11% kind of a number.
NT servers and storage, the total overall impact of those categories that
are affected by this of 9 1/2%.
What the left part of this chart shows is that we don't believe imaging and
printing will be negatively affected in any way, and we don't believe that
services will be negatively affected in any way, and again, most people accept
that that's the case.
So, we speak about an overall 5% revenue impact, but an affected category
impact of almost 10%. And, importantly, we have assumed a weighted average
contribution margin on this revenue loss, and I don't know if you can see that
on the far right side or not, of about 11%. The initial Walter Hewlett filing
made the case that the contribution margin loss on the product revenue here
would be 25%. Well, that is a ridiculous assumption, and I have told people
that.
If an analyst for me turned in that kind of a number, I would have fired
him or have done something. I mean, it is just unbelievable that you could
imagine a 25% contribution margin on this kind of a revenue loss. That is the
contribution margin of our entire business, including printing and printing
supplies, and all, many other categories.
In these categories, you're going to see a much more, much smaller bottom
line impact of the revenue loss. The 11% is what we've put into our models.
So, let's move on. So, if you look at the cost synergies alone, they would
represent. The savings of that represent about 60 cents in earnings per share.
If you then pull that number
down by the impact of the revenue loss that I just described to you, it brings
it down about 12 cents, for a net EPS impact of about 48 cents. Now, this is
what gets CFOs excited, and this is why after looking at this for a couple of
weeks, you say, not only does this solve some of our strategic problems, but you
have a huge, high confidence shareholder value added component as evidenced by
these kinds of numbers here.
And I assure you, these numbers are conservative. The last thing I want to
do is see this company put out a set of numbers that we can't deliver. This is a
high confidence set of cost synergies that we believe we can deliver.
Next chart, please. Look at those net synergies, that is, the cost
synergies offset by the revenue losses, and you take a present value of those
and apply some kind of a priced earnings multiple. Twenty to twenty-five is the
typical price earnings to multiple that HP has had the last five to ten years.
You see numbers like $7 a share, $8 1/2 a share. Again, this is why this makes
sense. You combine these kinds of economics, together with not paying too much
for Compaq, which I. We can go through that in the Q&A if you like, but I think
we paid a very reasonable premium for Compaq. We bought at the low of the
market. I think what you're going to see in this business now is some recovery
in their PC business, some recovery in their enterprise business, and a year
from now, we'll be looking back at this as a really good price to have paid for
these assets.
But you don't find $7 to $9 a share lying around very often. It's really
hard to grow a business to achieve that kind of improvement in EPS and,
therefore, stock price.
Next chart, please. I won't dwell on the balance sheet, but again, some of
our opponents have argued that we're buying a weak financial asset. That just is
not the case. You can see. Just look at cash, the top line there. We have about
$4.3 billion in cash. They bring about $4 billion in cash to the table. So, we
will end up, when we combine these two, if nothing else were to change, with
over 8 billion in cash.
We have very low debt, both individually and combined, and we will see a
dramatic improvement in cash flow, when we put these two companies together,
both due to profit improvement, which I'll address in a moment, as well as asset
turn improvement, that I touched on briefly earlier.
Next chart, please. This is my final chart. Carly set this up very well. We
have two sick businesses at this point in time. Our PC business, that is, HP's
PC business, and our enterprise business. Now, granted, `01, bottom of the
cycle, worst technology recession we probably ever had in the history of the
company, so this overstates how bad things are on a steady state basis, but it
is what we really reported in FY `01.
You can see then, an `03 combined company profitability. So, I'll read the
numbers for you, for those who cannot see.
The enterprise business. The operating margin last year for HP alone was
negative 3.2%. With the improvement that each company expects on its own, plus,
importantly, the synergies that I talked about earlier, which are not fully
mature in `03, but we're using `03 as a reference point, profitability gets up
to, does that say 9.2? I think it says 9.2.
In the access business, the PC business, appliance business, goes from a
loss of 4.2% to a profit of 3.0%. So, while this is not about PCs, it definitely
strengthens our PC business.
The services operating margin, 4.5% in `01. It was a very bad year for HP.
We usually do better than that, but it gets up to a 13.7% combined services
business operating margin.
This is good recurring revenue, revenue that is acquired by meeting
customers' support needs on a day by day basis that brings our people into their
offices every single day and serves as a good basis for us winning new business
from these same folks.
So, that's our financial picture, and now, my time is up. At this point, I
think we're going to go to Webb, who will tell you a bit about integration
planning.
CARLY: Leap over the barrier.
[MALE VOICE]: Saving time.
WEBB: Okay.
[MALE VOICE]: I'm going to take my jacket off. It's getting warm up here.
WEBB: Yeah, it's on the hot seat. Okay, so I'm going to switch gears here a
little bit and talk about the actual integration planning.
The two major questions obviously we're asked are, does it make sense and
can you do it? So, I'm the can you do it part of the presentation today, and
Susan [Bowick] will help me with that at the end when we talk about culture and
people and what we're doing in that very important area.
Carly talked to me in early September about leading the integration process
for HP. I have a partner in Compaq named Jeff Clarke. Jeff is the CFO of Compaq,
a great guy. He's from Digital, and he and I together managed this overall
integration process.
But I thought I'd talk a little bit personally about other than the shock
when Carly called me in the office. You want me to do what? You know, what did I
do and what are we doing now?
First of all, I had a lot to learn. I'll be honest with you. I immersed
myself in the history of big, complex mergers, what makes them work, what are
the pitfalls? We actually had a lot to learn internally, both companies, from
what both companies had done. One, the Agilent spin-off, and many people.
It's not intuitive, I think, that a spin-off and an acquisition are
similar, but from the way you manage the planning, they're actually quite
similar. In both cases, you're creating a new company. That's the easiest way to
think of it,
so our job as the planning team is to create a new company, which means that we
have to look across every possible facet of a corporation and figure out what
that new corporation is going to look like, whether we're talking about legal
structures and tax rates or employment practices or product strategies. It's
everything.
So, we learned a lot from Agilent, and I went around and spent a lot of
time with the people who had managed that process. I spent a lot of time with
Compaq on the Digital acquisition. Some things went well there, some things
didn't go well there.
As I think you all know, sometimes in life, when things don't go perfectly,
you learn even more than when they do. So, there's a lot of fresh learning
there. Michael Capellas there, and his team, came in and really turned around
that acquisition and so there's a lot of fresh learning there.
Carly mentioned the reinvention, which is the term that we've used for a
pretty significant restructuring of HP that we've gone through in the last
couple of years, and the reinvention is actually really an internal merger.
We took four sales forces and turned them into one on the commercial side
of the business. We took 83 product lines and merged them into 16 or 17. So,
we've actually been doing a lot of merger work inside HP, although people
haven't maybe thought of it that way, so we've learned a lot from what has
worked well and where we've struggled with our own internal work.
McKinsey has a lot of -- McKinsey Consulting Firm-- has a lot of experience
in this area. They have been consulting with the board before we made the
decision on the merger, and I immediately called them up and I said, put me in
touch with people who've done this before. I want to learn. And I've continued
to benchmark. It turns out a lot of our customers who've been through mergers
want to talk to me and they want to understand what we're doing, for two
reasons.
One is, they want to make sure this is successful from their perspective,
and also people who've done these want to share what's worked and what hasn't
for them, so we continue to do a lot of benchmarking, so for purposed of talking
about this, just to let you know, we've really done our homework on what works
and what doesn't work, in big complex mergers, and we continue to benchmark
ourselves against outside activities that have been successful.
The other thing we did, very quickly, is establish some sort of rules of
the road. How are we going to do this? So the first thing we did is we
established a vision for what we're trying to create here, so I will read it to
you.
Our goal is to create a great new company that is a leader in our chosen
fields and positioned to be the leading overall IT solutions provider.
And, of course, that's what gets us really excited about this merger is, it
accelerates our strategy. It positions us
really to take on IBM over time, to be number one much more quickly that we
believe we could do alone.
We also established. We asked ourselves a question. How are we going to be
measured? How do we measure ourselves in terms of whether this has been
successful or not? And we very quickly decided to measure ourselves the way we
think we'll be measured by our major stakeholders, so employees, share owners,
customers, partners, and we established a set of metrics and goals versus time,
really driven by how we will be measured by these very, very important
constituents that we have.
One of the key messages, and all the people I talked to about success in
managing a big merger is, you have to have a very strong rigorous process to
manage it. You can't just sort of send a memo and say, hey, we've decided to
merge with Compaq. Good luck. Send me a plan sometime. You know, you have to put
a very, very rigorous process in place, so we established a very strong,
rigorous planning process.
One of the things that's really clear is you have to, and this sounds a
little self-serving, but you have to put really strong people on this. You've
got to put your best people on it.
You don't need everybody. In fact, we have probably three-tenths of a
percent of our employees working on the merger, because the other goal we have,
of course, is to make sure that we deliver results as HP today. We can't afford
to get distracted by the integration planning and lose focus on
customers, on our employees, on our business results today. So, we've got 99.7%
of our employees fully focused on delivering results today, but we have this
group of about 500 people now, between HP and Compaq, working full time, put
very, very strong experienced people who can understand enough complexity and
have enough experience that they know how to make the right decisions for the
future company, and to drive that through dedicated planning teams of very
experienced people.
We established some key principles I thought I'd share with you. One is to
start with the customer experience. There's a natural tendency any time you're
doing any organization work and what's a company going to look like to think
about, to think internally, so we really wanted to start with the customer
experience, make sure that the structural decisions follow the strategy.
So, we start with customers. We define and agree on the strategies we're
going to use to serve customers. Then we'll talk about organizations. Then we'll
talk about the people who go into those organizations.
Another key learning I think that everyone had has to do with decision
making. And it sounds simple, but you've got to make decisions quickly. You have
to make the quick decisions and you have to avoid revisiting decisions.
Everybody's got an opinion, and you've got to listen to all those opinions,
but then you have to make a decision and the
decision has to stick, and you have to make the decisions in time.
Another really key one is what we call adopt and go. There's a temptation,
if you get two groups of people together, to say, well, here's how we do it.
Here's how you do it. But there's even a better way to do it. Let's do it that
way. Right?
So, that's what we're not doing, right? We want to make sure that the boat
floats out of the harbor the day the merger closes, so we're really sitting down
in each area of our business and looking at who's better? We still may have work
to do in that area to be best over time, and we will continue to do that work,
because you're never finished with that, but very important to adopt and go, so
get the teams together, balanced teams, by the way. I didn't comment on that,
but have balanced teams so in each area, whether it's finance, IT, the PC
business, the server business, have balanced teams between Compaq and HP on the
integration, and then decide which organization is stronger in which area, and
then adopt that process, strategy, product, whatever, rather than try to create
a lot of new things on the fly. Okay?
Keeping a strong focus on value capture, on really delivering that 2 1/2
billion and more in value capture, rather than doing a lot of cosmetic things
that might look good in the early going but don't really add to driving value
out, so making
sure we're really, have rigorous plans to phase out systems and things that we
aren't going to need over time.
And then, lastly, and Susan will go into this in much more detail. There's
really. She had a great slide she used at the very beginning here that said the
soft stuff is the hard stuff.
To focus on culture early, often, always. One of the learnings that emerges
is the cultural aspects of the merger are sometimes the most difficult. You can
get together and make the decisions on the strategies, but how do you get the
cultures to work together well? How do you get the people to work together well?
That's something we really have to address up front and continuously.
So, I commented a little bit. I'll move into status here. I commented a
little bit. We have about 500 people. The structure we used. We have three kinds
of teams. There are teams that are focused on the businesses, so we've announced
the structure, the business structure being four business units, basically, or
groups: printing, services, enterprise, and the PC business or the personal
systems group.
So, we have teams obviously focused in that dimension. Planning the
strategies and integration plans for those businesses. We also have the set of
teams focused on the functions, so finance, HR, etc., so you imagine we have all
those teams.
And then we have teams that are focused, that cut across all of that, so
value capture, for example, the people. How do we know that we make sure we have
specific plans to deliver more than that $2 1/2 billion. Well, there's a central
team of people that develops those targets, works with all the functions in
businesses and makes sure those targets are embedded in their integration plans,
so that's a good example of one of those cross teams.
Another one is organization. You know, the organizational structure and
cost allocation methodology and all these things are very much tied to how we
want to operate the company and also on achieving those financial goals. So we
have teams focused on defining the organization architecture for the company and
the measurement systems for the company, as well.
And then we have a small central team that manages the, if you want to
think of it, the perk chart or the [GANT] charts, so we have a very rigorous
process where we have very detailed schedules. All the teams have got their
deliverables very well defined.
We have monthly check points, kind of. In a sense, it's modeled after a
real. If you've ever been involved, and I'm sure some of you have, where you
have a very complex new product introductions, whether it was snakes or today's
world Superdome, very similar methodology, where you have all these teams, a lot
of interdependencies, and the teams meet all day Monday to report
on their progress, the last week identifying their dependencies. We have
processes to work offline to get things resolved.
Jeff Clarke and I hold a meeting every Wednesday with all the integration
leads and then there's a review with Carly, Michael, Bob, Susan, and Bob Napier,
who will be the CIO of the company after the merger. We meet for half a day,
every week, to make sure that issues are, decisions are approved, issues that
Jeff and I have not been able to resolve get resolved, and that we really keep
this on track, so there's a very tight planning process here.
I guess, a couple of observations on this. The teams are working very, very
hard. These planning teams are really burning the midnight oil, and some of
these teams are working extremely hard. They're working together quite well, and
one of our consultants. I think it was Accenture actually is working with the
finance team, made the comment a couple of weeks ago that the only way you can
tell who's from Compaq and who's from HP is by the brand on their notebooks,
which is really pretty interesting.
Now, having said that, there always is a learning experience, when two
teams come together. I think we found this in our own reinvention. If you try to
get the PC guys together with the services business, those are really different,
you know, and so there are some subcultures, even in HP, where teams have to
spend a little time learning how to work together, and we clearly go through
that with these teams. There's a few days up
to a couple of weeks of forming and understanding how people work, but once we
get through that, what I find that really distinguishes these two companies.
They're both extremely results oriented, and so we learn how to work with one
another and then we just get focused on the task at hand, so I think the way the
integration teams are working together is a really good leading indicator.
So, just closing. It's a big complex task. Some people have said, boy, this
is one of the risks is, this is a big, complex task. Well, you'd be crazy to not
say this is a big complex task. This is big and complex. What I would say,
though, is based on four months of doing this, I really am very confident that
we can and will execute and deliver the value, build the kind of company we want
to build, continue to be a great place to work. I really believe that we are
capable of executing this program well, and I'm sure there'll be more specific
questions later about this, but I just wanted to leave you with my honest
perspectives after four months. Going into this, I had no idea what to expect,
either. I think I mentioned to Carly, it's kind of like we're the cultural
astronauts. We've encountered the planet Houston, and you don't know.
You know, we've been completing with these guys for years. You don't know
what people are going to be like. After four months of working day in and day
out, I'm very, very encouraged, and I'm very confident in our ability to execute
together.
And speaking of culture, I will turn this over to Susan Bowick.
SUSAN: And I'm not going to jump over the stake. All right, what I'd like to do
is kind of separate what I talked to you about into two things. One is I want to
deal with some of the myths and some of the things that are in the media about
what kind of a place HP is to work today and then I want to talk a little about
what it looks like for us going forward because the merger with Compaq is
certainly a big infusion into Hewlett Packard of 65,000 employees. HP is about
88,000 now. So it will definitely be a different ball game going forward.
One of the things that is always interesting is change and how it impacts
us personally and how an organization changes and we have looked at everything
that we are doing in the company in a way where the people agenda and the
culture and the behaviors and the rewards tie to the competitive reality and
also the business. I want to just give you some facts going back to the year
2000, which has, a lot of you remember was a very competitive year. The dotcoms
were alive and well, not only in the Bay Area but in Italy, every place we were
doing business and HP was undergoing a lot of change and reinvention. That's
when we had talked about going from the 83 product lines to 17, the front and
back end organization, a change of that magnitude is a lot of work and it took a
tremendous amount of activity.
But if you look back at 2000, one thing that's remained constant has been
our ability to attract people into the company. The outside world still thinks
this is a great place to work. So while we were battling for talent, everywhere
in the world that we have offices, HP's acceptance rate once we made an offer
was in the high 70s and it remained five or six percentage points better than
our other competitors. So the outside world was looking us, they were pretty
jazzed up by the things they saw going on and we were attracting the very best
people from around the world.
The other good measure of do your employees believe in what you're doing is
your retention rate. And again, this is in 2000 when other companies were
hiring, many other companies in the Bay Area especially and we are tracking what
their attrition was during that timeframe ours remained at HP a third to a half
of our competitors'. And so while we were going through change and that's
frequently very hard on people, our employees were believing in the future and
sticking with us.
Another thing that we have kept very constant is we're still a company that
listened to employees and go out of our way to keep the communications channels
going two ways. So while the media reports Carly flying in jets and that we have
things going over the Internet and it's become less personal, I can tell you we
still do coffee talks, managers are still in front of employees, much as we are
doing here today and we have pulsed our
employees every six months or so, both about the reinvention and then about the
merger and I can tell you during the reinvention, while we were going through
the reorganization and jobs were changing, the number of employees in the first
survey that we did that are supportive of this, they understood the need for
change, they believed we were headed in the right direction was in the mid to
upper 80 percent. That is a phenomenally strong score, if you will, for people
understanding where we were going and why.
As the economy slowed down we took another survey in the Spring of 2001.
This was after we had announced pushing out some of the pay increases. We had
started asking for things like employees to take some time off. We did another
survey on the reinvention and the overall scores had only dropped six points
from the previous survey, which is when we were having really strong quarters,
if you remember back in the Summer of 2000. So by the communication and I think
the involvement of the managers in the company, we have stayed very much in
touch with our employees. This is not issue free when you go through the type of
changes we've been through up until now.
If you fast forward to the announcement of the merger that came out on
September 4th, the first poll we did of employees after that was the third week
in September and if you, you know, again put your mind September 11 had happened
and a lot of the external press did not receive the announcement of the merger
real strongly. The survey we did showed 84% of our
employees at that point still believed they were supportive of the merger. So
while the press and what you may hear at dinners that you have with friends
focuses on the issues that are real and we understand them and we're working on
them, the majority of the work force has continued to be supportive of the
merger and we do pulse the employees once a month. I just saw the September
data, which is after the Walter filings and a lot of pretty negative external
press, frankly, that had happened in November and December and again the
employees, the majority, at every, throughout the world have remained positive.
So we care about employees. We're listening to them. We understand the
issues that a merger and this degree of change causes and we are working them
very openly and very actively as a management team.
I'd like to move onto a little bit of one more factoid and then I'll talk a
bit about how we're looking at the integration. One of the things that a lot of
you helped this company build is our relationship with employees. A lot of this
has been around the diversity of our work force. How we can work together
globally. What HP stands for as an employer and in 2001, the year just ended, HP
won over 25 diversity and work force type awards internationally and I just
wanted to give you some samples of what these are to let you know that a lot of
the things that we've always stood are still in place and we're doing well,
thanks to the commitment of many people. Working Mother has
recognized HP in the U.S. as one of the best hundred companies to work for
because of our flexible benefits. In Korea, HP is ranked the number two employer
in the country. In India, HP is ranked the number two employer of choice. In
Ireland, we've won a national award for being the most inclusive employer
regarding people with disabilities. In the U.K., HP is ranked as one of the top
15 employers to work for. And the list goes on and on.
So while we are in the midst of change, we are managing it. We still stand
for the core values that we always have. The practices are what's changing. It
is not the same place as it was when many of you worked here but it is a great
place to work and our aspiration is for this company to continue to be a great
place to work. I would also like to address heads on some of the 2001 issues
that we worked with as a management team and I will do this quickly but 2001, by
far, has been the most difficult economic situation that any of us have ever
faced inside Hewlett-Packard.
We started the year last December realizing that revenue was falling off
quickly and those of you that have been in HP know that the first thing we
always do is look at how do you reduce operating expenses so that the company
remains healthy during the time that you're getting readjusted. We did at every
one of our executive council meetings, every month during 2001, we spent two to
three hours looking at all the alternatives we had related to people and if you
go back we started 2001 with what feels like
pretty, you know, traditional things and that is you look at short term measures
and you look at some voluntary measures so the first thing we did was push out
pay increases. We also asked employees to withdraw from their FTO bank because
that is advantageous but as we went through the year and it's got into the June
time frame and the revenue continued to fall off we realized this wasn't a three
or four month downturn, this was a protracted and more severe downturn than we
had experienced.
So on June 26 we went to our employees and gave them two messages. One is
we need your help participating with us in a voluntary short term payroll
reduction program and we would like you to volunteer to take time off during the
fourth quarters to help us reduce expenses. And we announced, at the same time
in the same memo, we are going to have to do a work force reduction program
during the fourth quarter, which is the first major layoff that the company had
had. But we went out with both of those messages at the same time because we
wanted employees to know that we had decided as a management team it was not
just a short term phenomena, in fact we did have to reduce our cost structure
long term.
Now back to the payroll reduction. We could have done a mandatory payroll
reduction in many, many countries. We debated whether to ask employees to
volunteer because they had already given so much or whether we should go with a
mandatory decision. It was a heated debate. We went out to the employees and
asked
them voluntarily to join with us in reducing costs and I can tell you 90 percent
of the employees got on the portal and participated, globally, in a ten day
period and of everyone that got on, 90 percent of the employees voluntarily
contributed by taking additional vacation or a payroll reduction for the fourth
quarter. That, in many senses, is what positioned us along with the work force
reduction program to report a good fourth quarter.
We have entered 2002 now, our fiscal year 2002, with what we feel is a good
balance between expenses and revenue and we are working very tightly to keep
that in track. If you have questions about the work force reduction program that
we did during the first quarter I hope you bring them up during the Q&A period
because I or anyone else on the team would be glad to answer how that went,
lessons learned, etc., but I won't go through all of that now.
Now looking forward at the merger. This is, certainly as I said, a big
project. The soft side of merging two companies is really the hard side and in
other mergers or acquisitions that we've done and I have been, I guess the word
would be blessed, but I have been part of HP's acquisition so I was with the
Apollo one was my first venture into the computer side of HP. I worked with
Verifone. I worked with Texas Instruments and you certainly do learn a lot from
what works and what didn't work and mistakes made and as Webb said, we're
[incorporating] our own learnings as
well as outside experts to build a very solid and different approach to the
Compaq merger than we have ever done.
One of the things that Webb also mentioned as we have looked at an adopt
and go philosophy. From the people practices standpoint and the importance of
culture, we are keeping the Hewlett-Packard practices as part of the adopt and
go or the start point for how we are approaching uniting the companies and
forming one strong new company, one strong new culture. If you look at the
traditional HP values and this is something we have used as a guidepost for the
last several years, especially as we've made the changes, but going forward,
there is nothing in these traditional values that is in conflict with where
we're headed with business strategies. And I'd like to remind a lot of you it's
a concentric circle model but the center or the core are the traditional HP
values. There's a respect for individuals. The high level of achievement and
contribution. We conduct our business with uncompromising integrity. We get
things done through team work and we encourage flexibility and innovation.
Those values sound like a great foundation for this new HP and this merged
company and in fact the combined management team and our first executive council
meeting led by Carly spent a third of the meeting on culture and on what did we
want this new company to be. So the values themselves are going to remain at the
core of the new culture. If you then in this concentric circle model mentally go
to the next round, those are the
objectives, those are the corporate objectives that are things like profits,
which fields growth, fields of interest, customers, citizenship, employees.
Those things will be modified but we're obviously here to sustain profit growth,
citizenship, etc., and then finally, the outside ring and this is where a lot of
folks say the HP way is changed or is not what it used to be. Those are the
practices of how you get business done.
So when we talk about culture, it's not a euphemistic or a vague thing.
It's how do we get things done around here and what does it feel like to come
work? Can I identify with what the company stands for? So specifically on how do
we build a culture of how do we get things done around here as a combined
company and what does it feel like to work here? We're doing a very systematic
approach on building the culture of the new company. From the very first
meeting, as I said, we have been working on culture along with the harder
aspects of the, and by harder I mean the things like getting the financial
statements in place, building a product roadmap for the combined company, etc.,
but we have picked off a team of folks from both companies that are working on
cultural integration of the two companies.
I saw Brian Moore earlier. I worked with him on the Apollo acquisition and
that was one where I think we had a lesson learned that we waited way too far in
the integration process to even start talking about culture integration and
actively managing it. Lesson learned, mistake avoided on this one. So in
looking at the culture, one strong new company, one strong new culture, we have
a philosophy which says honor the past, build on the past but secure the future.
So the cultural integration project is looking at what are the values, the
objectives and the practices of how we get things done and what kind of place
this is to work for in both HP and Compaq. We have just finished interviewing
about 150 senior managers from both companies, globally, and we've conducted a
137 focus groups globally in both companies. We now have a really good baseline
understanding of how both companies get things done and what it's like to work
here.
Our goal is that by close date and the timing on that, hopefully, will
still be during the first half of this next calendar year, we have several
deliverables that we have in place. One is that the values, the objectives, the
culture of the new company is clearly defined and it's broadly understood by
employees and managers in the new HP. That the culture enables the business
strategy and the brand, the HP brand stands for value, for quality and the brand
attributes and the employee attributes have to link together. The culture also
has to be fast, innovative, flexible, the things I mentioned earlier and it has
to produce alignment, commitment and excitement for employees in both companies
as a place to work and how we get things done and it has to be reflected in the
communication actions of the leaders that remain for the new company.
So the culture part, the soft part is the hard part, we are actively
working it. Every decision we're making around management practices, around the
people benefits and around communication is very much linked to what has worked
for us in Hewlett Packard. We will modify and change and adapt as we need to be
competitive going forward but I wanted to at least give you some flavor of how
we're still looking at the company's [most] valuable asset, our people.
CARLY: Great. Thanks Susan.
BOB: Carly, before we go ahead, can I just add on to some of the things that
Susan talked about? And as the longest standing employee here, let me speak to
culture. You know this is a very small team that looked at this for the first
couple of months and I was a part of it and one of the key doubts that we had
beyond the economics was the culture. For those of you who don't follow the
industry real closely, a couple of years ago before Michael Capellas was brought
in as CEO of Compaq, Compaq had a reputation for doing things from a financial
reporting point of view, from channel stuffing point of view that frankly we
used as you know, the exact opposite of the way we wanted to be.
If we were acquiring or thinking about acquiring Compaq three to four years
ago we could not bring these two companies together. It would be a stupid thing
to do because of cultural issues. But a couple of key changes occurred. One is a
new management team. Their board replaced the prior management team.
Put in Michael. Michael promoted Jeff Clarke to CFO. A lot of changes. Important
to keep in mind.
Secondly, it was about three or so years ago that Compaq made the decision
to buy two enterprise computing companies, Tandem and Digital. If you look at
the employee base of Compaq today, the majority of the employees come from
Tandem and Digital. Those are folks who grew up with innovations, complex
customer experiences, meeting enterprise customer needs, caring for employees in
a way that kept them around, now they didn't do it as good as we have done, but
they were more like us than I think we think about when we think about the name
Compaq, the PC company.
So it's not only from the point of view, financial characteristics but also
from the cultural characteristics, I think our first impressions are generally
not well informed and at least in my case, we're really wrong about what is the
nature of this company that we're buying.
Let me say one other thing about the changes that we have gone through
here. There's a lot of turmoil within HP and that's why we survey all the time
and we spend so much time on understanding how employees think. And there is no
question that we, the management team and the economic environment we have gone
through, have put our employees through a lot. And so we have gotten a lot of
feedback and not all of it positive. There's no question.
[end of tape 1, side B, beginning of tape 2, side A]
[FEMALE VOICE]: ... about very [glitch on tape]
BOB: ... story. About mid-'80s, we introduced the first voluntary early
retirement program, the voluntary severance program, etc., and I can tell you at
that point in time, almost 20 years ago, I was on a task force about what has
happened to the HP ways. You know, things are changing. Is it gone? Is it dead?
I don't know if John Doyle is in the room but John Doyle was a part of that
exercise and, frankly, what came out of it was the framework that Susan that
referenced here. Distinguishing practices from objectives, from values.
Nothing has changed except the intensity of the environment that we are in
today. I just want to let you know that we as a management team are as committed
today as we were 20 years ago to protecting those values and focusing on the
objectives that really matter so that we can be a strong, healthy, good place to
work company for years in the future.
CARLY: Thanks, Bob. Okay. So we have gone through a lot of material for you and
now it's your turn. We want to open it up to your questions. We have people with
microphones moving around the auditorium so if you just raise your hands and I
guess we'd like to cover as many questions as we can so maybe if you could avoid
doing a Sam Donaldson, you know, Sam Donaldson was famous
for the ten-part question. We probably can't remember all ten parts anyway so if
you could try and focus on one question at a time, I think we can cover as much
as possible. So let me start back there with the gentleman because there's a
mike there and then I'll come up to the lady here in the front row.
[MALE VOICE]: We've heard a lot about the HP surveys and that, I'm wondering how
do the other guys feel? What are the survey results in Houston?
SUSAN: Okay. It's, Compaq just did a survey called Voice of the Workforce. They
have a different name for it and they did that in September, late August/early
September and they had, what I considered very high scores considering that they
had been doing restructuring and layoffs and expense controls during 2001 but
they have tended to stay on top of the employee surveys as much as we do and
there is a lot of attention that this management team does pay to listening to
employees as well.
It's a different process and you know, some different questions but it is
very similar in that they do survey employees. Also do coffee talks. Ask the
managers to stand in front of employees and talk about business strategy as well
as people practices.
CARLY: If I could just add. I think the initial, let me back up and say first of
all, Michael Capellas as an individual is very much a coffee talk guy. I mean
they don't call them coffee talks in Compaq but as soon as our merger was
announced, Michael
basically disappeared for three weeks and spent all of his time in front of
employees. I've had an opportunity to address the employees of Compaq as well.
But I think to characterize the reaction of Compaq a bit different initially
than the reaction of HP people. Compaq employees initial reaction, frankly, was
one of loss. Our people were surprised but Compaq people said well, wait a
second, we're being acquired. I mean we're losing a brand. Why can't we make it
on our own? So I think their initial reaction was more grief stricken, if I
could use that term, than our employees.
But what has happened and we see this in the focus groups that we've just
completed that Susan referenced, what's happened over the course of this period
of time as Compaq employees have come to understand the power of this merger,
the majority of them now are very supportive and I think we're, frankly, as
confused and disappointed by some of the negative reaction in the opposition as
our own employees have been. Most of them want this to happen because they can
see the power of it. And where you particularly see excitement about this is in
our respective sales forces. Because sales teams really understand what
difference it makes to have a stronger product line, a broader position, they
understand the different it makes when you get a turn at bat every time, instead
of being excluded from some important opportunities. But they had to go through
a pretty deep cycle, I think to get over that loss.
Yes, the lady up here in front.
[FEMALE VOICE]: You've talked a lot about studying a culture clash. Can you give
a specific example of a culture clash and what you might be able to do to
mitigate it?
CARLY: So let me pick two, in particular, and I'm not sure, one interpretation
of a culture clash for sure, I think the way we're thinking about it is the
places where our cultures are different are opportunities for clash for flybys
but there are also in some cases opportunities for leverage, and let me give you
two examples.
If you look, these are some generalizations, but if you look at the data,
in general, HP people look to the past for guidance. Compaq people look to the
future. Now the reality is as a technology company, we need some of each. We
need to understand the lessons from our past but we also need to firmly face the
future because our customers are and our competitors are and the young people we
want to attract to the company are. But there's an opportunity where we could
talk past each other if we didn't understand that when we bring people together
to a table, the HP people are going to talk a lot about how we used to do it and
the Compaq people are going to talk a lot about how we ought to do it.
There's another interesting different and, again, it's a point of clash or
it's a point of leverage. HP people are very process oriented. That's a really
good thing when you're doing
complex things like integrating two companies, when you're doing complex things
like building systems, when you're doing complex things like planning strategies
and operating tactics out two and three years, which you need to do in some of
the technology areas that we're in. But sometimes we also achieve analysis
paralysis. You know, we get so engrossed in the process and the analysis that we
just can't get to a decision. On the other hand, Compaq people tend to be
process averse and they tend to move very quickly to a decision.
That's positive in some ways when you're responding to a customer or
competitor. It's negative if you have to go back and revisit the decision
because you didn't think it all the way through. And so there again is a point
where we can talk right past each other or we could sit down and say look, these
are our biases, these are your biases, let's figure out a way to leverage those
differences. And I think Webb sees that a lot in the integration team.
WEBB: Yeah.
CARLY: Those two, in particular. I don't know if you want to add.
WEBB: Yeah, I guess the only thing I would add is that we actually had the
integration team, we had an exercise very early on where we brought some
consultants in that we're using on the culture work and [Ransome] workshops and
just understanding one another's differences was incredibly valuable. Because
what we'd
found is the teams had been working together and had been having some
frustrations about how they worked. You know, why, Compaq people do it this way,
we do it that way, and when we characterized one another's cultures, and by the
way I've been part of two or three exercises where we've done this and we've
always come up with the same thing, which is good so it's very clear.
You know, the lights sort of went on and this one Compaq guy, this really
aggressive, hard driving guy says oh, now I understand why the HP people are
reacting to when I do that. Okay, God, I wish I would have heard that two weeks
ago and it's really helped. Just understanding the differences, you know, helps
people work together better. But, I won't say more than that but I think we do,
we are kind of the cultural astronauts, as I may have said earlier, and we do
see some style differences but the good news is we don't really see them getting
in the way. It takes, you have to understand them, first of all, and then you
say oh, I see why that's being done that way and then you move on.
CARLY: I think the one place where, and Susan referenced this a couple of times,
where there's no disagreement is what are values that are important? And what
we've done in these focus groups, starting with my own new management team, when
we complete the merger, is we divide people up into two groups. Compaq people
and HP people. And we ask them independently to talk about and
to list what are the things, what are the values that you think are important?
And what's fascinating is every time we do that both teams come up with the same
values, they may use slightly different words. When you put that list together
we say these are the things that are important to us and actually Susan had
someone in her organization, who on their own, took some of the output of those
groups and matched it up against our core values, our original essence core
values, and it matched perfectly. Which I think, frankly, is the genius of the
HP way. The core values are things we all can celebrate. The objectives are, as
I said earlier, pragmatic and common sense. It's the practices and the styles
and the habits where we have differences, where we have an opportunity to talk
past each other or, frankly, we have an opportunity for great leverage.
I'm sorry there's, let me just take a question, there's a question from the
overflow room. So, for those of you in the other room, yes, please go ahead.
[FEMALE VOICE]: There are a lot of jobs lost in the Valley. How many of the 65K
from Compaq and 88 from HP will eventually lose their jobs?
CARLY: Okay. So the figure that we have talked about associated with the $2.5
billion worth of synergies is 15,000 people, not all in the Valley. This is a,
the 15,000 is a global number across both companies, across three years. And
15,000 is a lot of jobs, it's a lot of people. I don't want to minimize the
impact of that but I think it's important to recognize that it is across these
two companies and on a global basis and importantly, we are making the job
decisions strategically based on a plan.
Bob mentioned a couple of times, you know, if you have two country managers
in Germany, you don't need two country managers. One of those people will lose
that particular position. But, candidly, as difficult as layoffs are and layoffs
should always be a last resort, not a first resort, I would much rather have the
opportunity to build profitable, healthy, sustainable businesses, which is the
best protection for jobs and to deal with these job cuts strategically and as a
result of a plan, rather than say, for example, having to deal with shutting
down a whole business because we can't make money and we can't sustain it. And
so I think one of the things that we've tried to be very direct with our people
about is because the highest standards of integrity and candor are part of what
this company has always stood for, it honestly isn't 15,000 people globally
between these two companies over three years versus no layoffs. We have
businesses who if left alone we will have to take people out. And so what we're
really focused on is building those healthy businesses. So I hope I'm answering
your question. Come back if I haven't.
Okay? Yes sir.
DICK: Question is probably for Bob. But looking at the numbers now, you show on
Carly's slide going on the e-bit from about $1.6
billion Hewlett-Packard this year to about $7.5 billion in '03, an
increase of about $6 billion and that $6 billion, two of it as I understand,
comes from net synergies after you've taken out lost revenue that you're
anticipating, which means there's another $4 billion that has to be gained. I
apologize if I should know, but how much of that $4 billion is profit that
Tandem is bringing over directly in the year comparable to the $1.6 base level
that was for HP? And then how much of it, of that $4 billion has to be generated
from new things that happen because of this? Could you clarify that for me, Bob?
BOB: I can somewhat, Dick. But, I won't be explicit about Tandem or any
particular piece of it. What you need to understand is that, again, `01 was a
really bad year. We are already showing improvement from the depths of `01. Some
of that is coming from the nature of the slight business recovery that we're now
seeing, but after following a declining revenue falling short of plan each and
every quarter, which is what both companies did for four or so quarters, we have
finally seen stability and actually a little bit of an up-tick within HP, and we
have both taken extensive cost reduction action. We talked about that earlier,
so that just naturally each company's exit rate from `01, or maybe call it Q1,
`02 is much better. It's much more in balance, so that is the biggest overall
driver to the remaining $4 billion that's in here.
There are certainly some specific advantages that we get from some of the
Compaq businesses that are brought to this. As I said earlier, the Tandem
business, both the hardware and the support part of it, is very profitable. That
will be brought in. It is, I think, as well, going to pick up as business picks
up here, and I don't know how many of you follow it closely, but Compaq did
release information before the market opened Monday morning that they were going
to beat their quarter. They were going to have revenue of at least several
hundred million dollars ahead of their prior guidance, and whereas, they had
guided to a 3 cent per share loss, they are now going to make money.
So, this is a reflection of the fact that `01 was a bad year, and, in
particular, for a company like Compaq that closed their quarter in September,
the effects of September 11th were very substantial, and they had very little
time to recover from it. So, they had a particularly bad Q3, and, again, we're
going to see some improvement from all of that, so I hope that helps a little
bit.
CARLY: I think maybe the only other thing I would add is, of the additional $4
billion. Let me say it differently. In the $7 billion, it's basically made up of
the synergies and business as usual plans from the two companies. It requires
none of the revenue upside that we've talked about, nothing new to happen in
terms of new product introductions or acquisitions. It's business as usual, with
revenue loss and synergies.
So, one of the things we're quite excited about, in the spirit of trying to
make conservative commitments, is that there should be some real revenue upside
in some key areas. We should be able to grow, for example, faster than the
market in places like storage, where we now have a leading position, but none of
that's assumed in the $7 billion.
Yes, way in the back.
[FEMALE VOICE]: I'd like to find out. I heard that HP was in debt over $2
billion. I wanted to find out if that was true, and Hewlett and Packard always
pride themselves on not being in debt and borrowing money from all the different
sites when they needed it.
DICK: So we do have a couple of billion dollars in debt, but this is not new.
Keep in mind that we also have $4 billion in cash, and the way to look at it is
on a net cash or net debt basis. And we are in a favorable position from a net
cash point of view.
Now, we have had debt for a very long time, and it is intentional. We
finance our customers' leases and rentals. We want to use debt to finance that,
low cost debt. We don't want to use our valuable equity to finance that.
This is true of all technology companies or even non-technology companies,
but IBM, General Electric, anybody who provides leasing to their customers wants
to use borrowed capital to do so. Otherwise, you dilute your own shareholder's
equity
returns. We don't even quite have as much debt as we should have to finance all
the receivables.
Depending upon market conditions, we may be a little bit more or a little
bit less than what we intend to have. We're actually a little bit less right
now. The rating agencies look at this. They understand this. It's very
appropriate. It's relatively short-term debt. Our average maturity is about a
year and a half, which is intended to match the average maturity of the lease
payments that our customers have committed to pay to us.
We also have a tiny bit of debt for some of the real estate assets that we
have in place. I'll talk more about it later, but in a few cases, again, we have
kept real estate assets. We want to use debt to finance them, not equity.
CARLY: Yes. Right there. I'm trying to go where the microphones are. Yes. Ma'am.
[FEMALE VOICE]: I would like to address the HP stock and the Compaq stock. What
happens with the value of the HP stock and the Compaq that people have each
stock, employees from one coming to the other.
CARLY: Okay. You want to talk about the swap and then.
BOB: Sure. The key economic negotiations that took place was over what is called
the exchange ratio, and we agreed in this merger arrangement. Both boards agreed
to a 0.6325 exchange
ratio. So what that means is that for every 1 share of Compaq, you will get
0.6325 of Hewlett-Packard.
Now, for the Hewlett-Packard shareholders, there's no change in stock
ownership. If you own a hundred shares today, you will own a hundred shares
after the deal is done. What does happen, of course, is that there are more
shares outstanding because the 1.7 billion or so of Compaq shares get translated
into about a billion new HP shares, so our outstanding shares go from around 2
billion to around 3 billion.
That's all taken into account in the accretion dilution calculation, and I
did not show you that slide today. I meant to mention it. This deal, with all
the assumptions that I laid out earlier, is about 13% accretive. That is, it
helps earnings per share in the first full year, that is FY `03, after the deal
is done.
It will be even more accretive than that in `04. So, even though we issue
more shares, we buy some valuable businesses. We take some costs out of the
system and we end up with a higher earnings per share than we would have
otherwise, to the tune of 13% and, again, we wouldn't be putting those numbers
out there if we didn't have good confidence that we could achieve that.
So, does that answer the question? It's simply an exchange ratio. I guess
she asked about employees as well. So, Compaq employees have options in Compaq,
just like HP employees do.
Most of their options, virtually all, are under water, but nonetheless, if
they have an option to buy a Compaq share at $20 a share, they will now have an
option to buy Hewlett-Packard at 20 times 0.6325, whatever that is. Twelve or
thirteen. I'm sorry, it's the other way around. Twenty divided by 0.6325. It
would be divided by 0.6325, so it will be an option to buy HP at $30 or $33 a
share, something like that.
So, no impact on Hewlett-Packard shareholders in terms of actual share
exchange. Compaq exchanged at 0.6325.
CARLY: Okay. I think we have a question from the overflow room, and then we'll
go to the lady right there. So, yes, sir.
[MALE VOICE]: Yes, Carly. The new company that we're creating here with the
merger, is it going to be Inventipaq or something new, or is HP going to lose
its name or what? I'm not clear on that. Can you explain that?
CARLY: Okay. There are a couple of things that were very important to us in
putting this together. First of all, the name of the company will be HP. The
logo, the brand of the company, will remain the same. The headquarters of the
company will remain here.
And, frankly, we've had a lot of employees say to us, well, why don't you
call this what it is? Why don't you call it an acquisition? Because, in fact,
this is an acquisition. We're acquiring a company. We are the surviving brand.
We have the CEO, etc., all the things that make it an acquisition, and the
reason we're calling it a merger is because this is about putting two management
teams and two employee populations together in a way that both can be excited
about what we're doing.
We need the people of Compaq to feel as much a part of this HP as the
people of HP do. And so, we thought it was appropriate and important for
execution and implementation that we speak with our colleagues at Compaq from
day one, and say, we are in this together. Together, we are focused on building
a great HP. But be very clear. The name, the logo, the headquarters of the
company, the core values of the company, as we've said many times, remain HP.
Thank you for asking that. That's a really important question.
[MALE VOICE]: Thank you, Carly.
CARLY: Yes, ma'am.
[FEMALE VOICE]: There's been a lot of talk in the press, as I'm sure you're well
aware.
CARLY: Oh, yes.
[FEMALE VOICE]: As well as Mr. Hewlett, who do not agree with this merger, and I
was wondering why you haven't addressed any of the negatives that are being
said, and how you plan on going around these negatives? I've heard all the
things what you told in the press, but not addressing the problems that people
have addressed.
CARLY: Okay. Well, I guess I would say, if you feel that we're not addressing
any of the issues that Walter has raised, then I don't think we're doing a very
good job. So let me try and address them in a couple of ways.
One, the filing that we made on December 19th, which we've showed you some
excerpts from, which is available to all of you, not only describes the merger
as we see it, but also addresses specifically some of the claims that Walter
Hewlett has made. So, if you want a point by point rebuttal of Walter's
commentary, you can find that in that filing.
But, specifically, I think it's fair to say that Walter's key points are
the following: One, why don't you just focus on imaging and printing? And I
think what we've tried to demonstrate today here is, there is no future in
treating imaging and printing as a cash cow. All of our businesses need to pay
their own way, and, by the way, imaging and printing requires to go after the
big growth opportunities going forward, requires the capabilities of computing
and services and software.
And so, if you're interested in growth in imaging and printing, both in top
line and bottom line for more than the next 12 months, we need to keep this
portfolio together.
Point two of Walter's commentary. This is all about PCs. Well, frankly, I
hope we've been able to demonstrate today that this is about much, much more
than PCs. Walter also says, well, why don't you just get out of PCs? Well,
frankly, I don't want
to shut down a business with 20,000 people in it. And I think the PC business is
an important part of our portfolio going forward, so I think just getting out of
it isn't a particularly responsible solution.
Walter's third claim is, well, you're going to lose 20+ percent of your
revenue at 25% contribution margin. I think we tried to go through that those
are very faulty assumptions, and, frankly, the thing that. You know, the average
contribution margin of all this revenue loss was 25%, then PC ain't a commodity.
Twenty-five percent contribution margin means every single one of the
businesses we're in is high-end margin, so it's just, frankly, flawed math. But
I think beyond that, the revenue loss, there are a couple of things that make us
confident in our own revenue loss projections. One is that we've done a segment
by segment analysis, and we've looked at where is the revenue most at risk.
Frankly, for Walter to say we will lose revenue in imaging and printing
suggests to me that Walter has no faith in the employees of this company. And
the employees of imaging and printing are very focused, and I think you could
see by the results that they turn in the fourth quarter that they're not taking
their eye off the ball. And I think you'll continue to see in the results we
produce that people aren't taking their eye off the ball.
And I think the last thing Walter says is his analysis is based upon a
static view of the industry. This is an industry that is on the move, every day.
For us to assume that we can stand still and the industry will wait for us is a
recipe for disaster.
So, that's the quick answer. But I think, as well, I would say that this
board has gone through, and this management team, has gone through an exhaustive
process, a deliberate process, a comprehensive process. Has looked at a whole
set of alternatives and knows that this is the best alternative in front of us.
The alternative Walter presents is, I just don't like it.
BOB: Can I just add to that, the piece. I shouldn't say Walter's piece, because
he hired somebody to do it, and they did their job. It is a position paper. It
is not an analysis.
It looks at the cons of the merger, not the pros versus the cons. We have
addressed most of those here today. One that we haven't addressed. It is again
in that December 19th filing.
Walter makes the case that the statistics show that mergers don't work,
high tech mergers don't work. And I'll give you the short order version of it,
because we have a very nice chart which takes his data and converts it into a
fair analysis, as opposed to a biased analysis.
They compared the returns of mergers in the second half of the `90s to the
S&P index returns. The S&P index returns in the second half of the `90s were
dominated by strong technology
returns. Most of the mergers in his sample were not technology mergers. So,
you're comparing the returns of non-technology mergers to an S&P return which is
heavily influenced by technology. So, there's a huge mix problem.
We took those same set or a sample of those same mergers and looked at them
in the context of returns compared to their industry, and, in every case, his
negative compares become a positive compare, so it's just that kind of thing
that I think you need to look at carefully.
You know, there's statistics and there's damned statistics in all of this,
and you just have to look at it in a fair and balanced way and I think you can
understand why we are as enthused as we are about this deal.
[FEMALE VOICE]: [inaudible]
BOB: I'm sorry. I couldn't hear.
CARLY: I think your question was, how about the rest of the analysts, and, yeah,
I think it's a very reasonable question.
If you look at. Let's go back in time to September. I will tell you very
candidly that our board knew that the initial reaction to this merger would be
negative. We talked about it. And the reason we knew it initially would be
negative was because we were at the bottom of a cycle. The usual mergers don't
work. We knew that people initially, because they did not have a good
understanding of Compaq's business would say it was all about
PCs, and so, we anticipated a fairly substantial immediate drop in our stock
price as a result.
It is also true that if you look at the progress we were making, with the
analyst community, with the stock price, with our investors prior to the Walter
Hewlett action, we were making real progress. When Hewlett came out with his
opposition, naturally, that injected a whole set of uncertainty into the market,
but I must say, Bob and I spend a lot of time with investors. We are absolutely
making progress with investors. This is not a simple story that you tell in 30
seconds.
I think we are making progress with some analysts. We clearly have made
progress with industry analysts.
But I would also remind you, think about the conventional wisdom in the
year 2000. Remember the year 2000? The old economy was dead. Internet stocks
were going up forever. Ariba was worth more than General Motors. That was the
conventional wisdom.
And guess what? The conventional wisdom turned out to be wrong. And so, I
think the point is that we as a board and a management team, cannot run this
business by the headlines. And we can also not run this business based upon
short term stock price.
We have to run this business based upon our knowledge of the industry, our
knowledge of what makes this company unique, our knowledge of what we're capable
of doing for customers and
against competitors, because we know most about this business in the industry.
The media doesn't, and the analysts don't, in the short term, and what we have
to focus on is the creation of shareowner value, not for a month. Not even for a
quarter, but for year after year after year.
We have a question from the overflow room.
[MALE VOICE]: Hello, this is Dan Cruz. It's clear that upper management is in
favor of the acquisition or the merger, if you will, but recently, I know that
Susan indicated that there was 84% pro the merger in the previous [inaudible]
that they're dead and know on November 6 that dropped down to 55%, that morale
had dropped considerably since then.
What are you doing about. because mergers happen because of the people in
the company, not upper management. So what are you doing about that morale
problem and how are the people going to be brought on board to make the merger
possible?
CARLY: Okay. So, first, again there is no question that our employees were
startled and confused and concerned when Walter Hewlett made the decisions and
the announcements that he made. And, in part, they were concerned -- let's be
very candid -- they were concerned because he is, after all, a Hewlett, and they
were also concerned initially because they said, he's a member of the board. I
mean, maybe he knows something about this that we don't know.
We have been communicating very aggressively with our employees since the
announcement we made on September 4th and we've been communicating very
aggressively with our employees since Walter Hewlett moved. I, but also members
of the management team all over the world, not just the people you see here, I
routinely stand up in front of employees and just answer questions for two
hours.
And I think I would say a couple of things. First, there is no escaping the
fact that employees are uncertain when we say we will globally, across these two
companies, take out 15,000 jobs. We are being as candid as we can with our
employees about the process we'll use to do that, where they're coming out of.
You may have noticed Bob Wayman's chart about where are the synergies? What's
the timing of those? How will we announce the decisions? We're giving them as
much information as we can, but, clearly, there's uncertainty caused by that.
But I must tell you that I think it is, not I think. I know, based on the
surveys we're doing, that while we must continue to communicate openly,
honestly, and continuously, while there are real issues of concern to our
employees. What's the culture going to be like? How are you going to make the
decisions about who's in the job? When will we know more?
All of those things are real. It remains the case that the majority of the
employees in this company support this merger.
Let me see. Tons of hands. How about, yes, right there?
[FEMALE VOICE]: As an investor, I'm interested in knowing something about your
plan for the dividend structure, now, short-term and long-term.
CARLY: Okay.
BOB: Unfortunately, we have not yet addressed that decision. I think you can
expect us to continue to pay a dividend but the board has not deliberated at
this point in time on what to do with regard to possible dividend on a going
forward basis. So I just can't add anything to it.
Both companies today do pay a small dividend.
CARLY: Yes. How about we get a couple back there?
[MALE VOICE]: I hear from everybody up there, but no marketing people. Can you
sell this new company? You really. I mean, I remember Noel Edwards saying, I can
really sell this product, and a guy named Joe [Schulmandorf], but I haven't
heard anybody up there say I can sell this.
CARLY: Sir, when you say, can you sell this company, do you mean to investors to
get the vote, to the product lines, or the customers, or all of the above,
maybe?
[MALE VOICE]: Your customer. Your marketing manager goes out and your salesmen
go out and they sell this new Hewlett-Packard.
CARLY: Can they sell it?
[MALE VOICE]: Do they really think they can sell it.
CARLY: Absolutely.
[MALE VOICE]: This is going to be better than sliced bread. This is what we're
really going to do?
CARLY: Yes. But let me just give you some color on that. The people who were
most enthusiastic, I think it's true in both companies, when this deal was
announced was the sales forces.
And the reason the sales forces were most enthusiastic is because they
understand what happens when you have a better product line. They understand
what it means to have more sales people calling on customers every day, and they
understand what it means, as I've said before. Today, Hewlett-Packard doesn't
get a chance at bat every time. There's sometimes customers just say, you know,
I'm not going to talk to Hewlett-Packard about this. They don't have a strong
enough offering. I'm not going to talk about. I'm not going to talk to them in
industry standard servers. I'm not going to talk for them in supercomputing. I'm
not going to talk to them for an outsourcing deal.
Given the product line, the presence we have in accounts, we will get a
turn to bat every time. Sales people know what that means. By the way, we may
not win every time. We're not going to hit a home run every time we're at bat,
but we get to step up to the plate, and that's a big deal. So, yes, we can. And,
by the way, we think with support from people like you, we also can get a
shareowner vote. And that's what we intend to go do.
CARLY: Boy, all the hands went up on that one. Yes, ma'am.
[FEMALE VOICE]: My question is kind of going in a different direction. I'm
wondering on the filings in Europe and in the United States, how that's going
and what happens if that doesn't succeed as GE and Honeywell did?
CARLY: Okay. So, let me try and first draw some distinctions between this and
GE/Honeywell, because I think they're important.
The GE/Honeywell deal was a deal in an industry where there were very few
players, very concentrated set of customers, and very high barriers to entry. We
are talking about a deal where our highest amount of combined market share is in
places like PCs and NT servers, where there are millions of customers, lots of
suppliers, low barriers to entry, and constantly plummeting prices.
So, very different competitive environment, and that's important because
the EU and the FTC look at those markets differently than they looked at jet
engines and financing.
Secondly, we've taken a very different approach than GE/Honeywell. We've
learned some lessons from them.
That became a very politicized process very quickly. You know, it was lots
of high ranking people having lots of highly publicized discussions. What we've
done instead is approach this in a very low-key, low publicity fashion, with the
staffs of both the EU and the FTC. And I think that has been the right approach.
Our conversations have been, I think, very productive.
There's a good cooperative spirit, and we hope to have resolution from both of
those agencies in the very near future here.
I think you can always get regulatory approval. The question is, at what
price? And so -- and always this is an overstatement -- but I think there's no
question that this deal will be approved.
The question is, what are the things that we need to do in order to gain
that approval? And as you would, I hope, expect from us, we've done a lot of
scenario planning around what are the possible things, so that we understand the
impact.
Yes, sir. And we're going to take two more and then we're going to have to
wrap it up here, so that you have a chance for the product fair. Yes, sir.
[MALE VOICE]: Yes. Thank you. The presentation this morning has been very
convincing, and as we all know, there's been two local charitable foundations
that are against it, and you addressed Mr. Hewlett. It's been my understanding
that most of the financial analysts since the merger was proposed, have been
negative to neutral at best in supporting this merger.
Is it important, as you go forward, to get these analysts to move from this
neutral and negative position to support this position? Are they a good
barometer, possibly from an outside the corporation objective standpoint to
support this?
And, secondly, in the long term, as part of the planning, the [per chart]
planning, how will we know if this merger is really working as we want it to?
CARLY: Okay. So, with regard to the analysts, certainly, they're an important
ingredient here. They don't vote. They don't hold shares. But they are
important. They influence perception, at a minimum.
We do have a number of analysts who are very positive on the deal. They
don't get quoted quite as much in the press right now, but never let it be said
that the media is unbiased.
But we have very, very positive analyst reports out of Deutsche Bank, out
of Buckingham. I think it's at four or five right now.
You are correct that there have been a whole series of analysts who were
initially very negative. Some of them are beginning to move. In fact, even some
who started out very negative are now saying, you know, I do understand the
strategic logic here, and I think the synergies are achievable.
They may be damning with faint praise, but they are at least accepting the
strategy and the synergies, so, bottom line is, we're going to continue to work
the analysts. It's important that we do so. But it's also important to remember
that fundamentally what we as a management team need to focus on is the real
issue here, which is winning a shareowner vote.
And so, our most important efforts are focused on those people who actually
own this company and those aren't analysts.
[End Side A, Tape 2; begin Side B, Tape 2]
[MALE VOICE]: I appreciate this session, and I know you're doing a lot of these
with analysts. I mean, with investors, but I'm wondering was this kind of a road
show going around the world, and also the full page ads that you're spending. Do
you have a pretty good idea what the budget is going to be to turn investors
back around on this thing? If so, should it be part of the SEC filing?
CARLY: Okay. Well, and, by the way, I realize that I neglected to answer the
second part of your question, so let me come back to that.
But, Al, to address your question first. First of all, the reality is that
the majority of the budget for what we're doing is management time and
attention. So, we will continue to run ads and, as is required in a proxy vote,
send information to our retail shareowners, but it is not a large enough sum of
money that I think it's relevant here. If something changed, obviously we would
disclose it. But it's actually quite small. The biggest piece of the budget is
how much time we spend in front of people.
With regard to the second part of your previous question, sir, because I
think it's important, you asked. how are we going to know if this merger worked?
And I think one of the reasons we're being very explicit about what we're going
to accomplish
from a synergy point of view, and where we're going to accomplish it is so that
we can provide to people a very clear roadmap.
So, these charts we're showing you, the charts that are in our SEC filing,
we're going to come back to those charts. You know, they're not going to
disappear. It's -- this is our plan and we will come back in our quarterly
results and say, how are we tracking against that plan?
For those of you who have looked at the filing, you will note that, for
example, there's a set of implementation integration planning steps that we're
going through. And in our filing. we said we were ahead of schedule and halfway
through detailed planning. We've now completed phase two. It's a three phase
integration process. We've now completed phase two and are moving into phase
three.
So, we will continue to update people on where we are in the integration
planning. Are we getting the numbers that we expected, and I think the final
thing that you should be looking for is, both before the merger closes and after
the merger close is the results that this company, one company going forward,
produces two companies separately produced, the result we're producing. Because
those results are a good barometer on are people distracted? Or do they have
their eye on the ball? Are we losing customers or are we gaining customers? So,
things that Compaq reports, things that we report before the vote, I think, are
important indicators of progress as well. But we want to be
very explicit so you know, are we delivering on the plan that we're talking
about here?
[MALE VOICE]: Carly, just to expand a little. I mentioned earlier, I mentioned
that we're measuring ourselves in the eyes of our major constituencies, right,
so do customers view this as being successful, and the comments about, will
customers buy? They're going to vote. It's going to be clear. You know, are they
going to view this as a positive thing that we can add more value to them than
we could before? Employees. Are employees going to view this as a great place to
work? That's certainly our intention, but we're going to be pulling employees
and getting their feedback on what's working, what's not. Partners and so, I
think, certainly, shareholders are key. We have to demonstrate that we've
captured the value that we've talked about, but we have to look at all those
constituencies, and they will judge the success of this.
[MALE VOICE]: Let me just add on the disclosure question, Al. We did, in our
preliminary filing put in the cost, expected costs of accomplishing the merger,
which includes investment banking fees, lawyer fees, and they would include
proxy solicitation costs. Obviously, that was done before it became such a
battle, so we will updating that number, but it's still pretty small.
Remember that number earlier: $5, $7, $8 a share. Three billion shares
outstanding. Twenty to twenty-five billion
dollars worth of net synergies, a few ads gets to be pretty trivial compared to
the potential value of this.
CARLY: Okay, we're going to take one last question, then, unfortunately, I think
we have to wrap it up. Yes, ma'am. No. Sorry. The lady. I apologize. I didn't
see you, [male], I'm sorry. Yes, go ahead.
[FEMALE VOICE]: I'd like to come back to your statement about secure the future.
To me, that's rather important in a world when we are at war. I'd like to see us
secure the future for Hewlett-Packard and for Silicon Valley and for America.
Could Dick Lampman say something about HP Labs, and the wonderful products that
we should be making, and I think we are, to help our nation achieve security for
our wonderful communications.
CARLY: Okay. Yes, ma'am. Go ahead, Dick.
DICK: I did not plant that question.
CARLY: But you're glad to get to answer it.
DICK: Good to see you again. How are you? Let me answer that question in two
ways. One, in general, about securing the future. At the company level, you've
heard about the technology that Compaq is bringing in and, really, the roots of
that technology that come from Digital Equipment, who was, for many years, a
very strong competitor of ours and has many, many wonderful engineers and
scientists and also the technology team from Tandem.
So, you've heard about that. Beyond that, in their research arm, they have
a very, very strong research team. They are very excited about joining HP. They
complement a lot of the technologies we have in servers, in storage, in
software, in mobility and hand-held devices. So, a lot of capability that we're
going to add to the company.
In terms of your specific question about the situation we have today, we
actually are making some very specific contributions which are going to be
important for security and for national security and, in particular, work that
we've been doing in the LINUX operating system, where we have very unique
capabilities that HP put into the IA-64 program, which we're doing with Intel,
which will allow us to do unprecedented levels of security, and we are
developing a secure LINUX operating system that will help activate that. So,
there's lots more to come that you haven't heard about today, but we have our
eye on the ball for the future. Thank you.
CARLY: The only. Just last comment I would add on that is, we talked briefly
about Compaq in the supercomputing arena and being the leading supercomputing
provider now.
As you would expect, Compaq is sitting with their capabilities. They are
sitting in the middle of a lot of national security applications, national
defense applications, and I can tell you that the defense and security community
is quite excited about this combination.
I've had a number of conversations with defense and security officials, as
has Michael Capellas, so I think there's a lot of potential here for us to
continue to move forward. And we've also made some pretty key hires in the labs,
people who come from that community. Steve Squires, just as an example. Someone
we hired last year who comes to us from DARPA and has a lot of good connection
there, and, frankly, Compaq because of their product line has done a more, I
would say, consistent job over the last several years of staying focused on the
government applications, and so we'll be leveraging that capability. So, thanks
for asking.
Unfortunately, we are going to have to draw this session to a close. Let me
just end by saying, first, we appreciate very much you coming today. I
appreciate even more the contributions that all of you have made for many, many
years to this great company.
The contributions you've made give us a foundation to stand upon, give us a
stronger foundation upon which to build and secure our future. This has never
been a company of followers. This has always been a company of leaders. This has
always been a great company. It will be a great company going forward.
So, thank you very much for your support and your interest, and I hope you
enjoy the product fair outside. Thanks. Take care.
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 HP's annual report on Form 10-K, as amended on January 30, 2002,
for the fiscal year ended October 31, 2001 and HP's registration statement on
Form S-4 filed on February 5, 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 February 5, 2002, HP filed a registration statement with the SEC containing a
definitive joint proxy statement/prospectus regarding the Merger. Investors and
security holders of HP and Compaq are urged to read the definitive joint proxy
statement/prospectus filed with the SEC on February 5, 2002 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 on or about February 6, 2002 seeking their approval of the
proposed transaction. 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 HP's annual report
on Form 10-K, as amended on January 30, 2002, for the fiscal year ended October
31, 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 definitive
joint proxy statement/prospectus filed with the SEC on February 5, 2002.
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 Compaq's annual report on Form 10-K for the
year ended December 31, 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
definitive joint proxy statement/prospectus filed with the SEC on February 5,
2002.
* * * * *