This Wall Street Journal article ($) provides a good update on the now two year old merger between Hewlett-Packard Co. and Houston-based Compaq Computer Corp.
The theory of the HP-Compaq merger was that it would remake HP. However, the new HP looks about the same (albeit bigger) as the old one.
Prior to the $19 billion deal closing in May 2002, HP had a mediocre computing business that was buttressed with a traditionally first rate printer unit that generated most of HP’s revenue and profit. Two years later, that profile hasn’t changed much. HP’s printer unit continues to contribute about 30% of quarterly revenue and 70% of quarterly profit.
HP is a much bigger company now, with annual revenues of more than $70 billion compared with about $45 billion before the merger. HP employs about 140,000 employees in 170 countries. Before the merger, that number was closer to 85,000.
Moreover, HP’s upper management is essentially unchanged since before the merger. Chief Executive Carly Fiorina still runs HP, and the HP executives who were in charge of the tech services and printer units before the Compaq merger remain in those roles.
The bottom line is that HP continues to face the same questions over growth and the relative value that such growth brings beyond its printing business. As of the close of trading yesterday, HP’s stock price was $19.78, just slightly ahead of its closing price of $18.22 on May 6, 2002, the day on which the Compaq merger was consummated.
That doesn’t please money managers, according to the WSJ article:

“At the end of the day, you’re still left with a company that has a great printing franchise but is struggling to sustain profitability in its other businesses,” says Marty Shagrin, an analyst at money-management firm Victory Capital Management. “Our analysis of HP’s business today isn’t meaningfully different from two years ago.”

HP contends that it is less dependent on printer revenue and profit and has become a more well-rounded company. Revenue from the printing unit accounted for 31% of H-P’s overall revenue in fiscal 2003, down from 43% in fiscal 2001. Although the printing unit made 79% of total profits in fiscal 2003, that percentage was down from 100% in fiscal 2001. Accordingly, HP maintains that trend is good, and is likely to continue.
On the other hand, some analysts argue that HP has simply diluted the profitability of its printer unit by spending on its PC and corporate computing business. One analyst in the WSJ article calculated that a pre-merger HP would have generated earnings of $1.59 a share in fiscal 2003 from its printing unit alone, while HP’s actual earnings were $1.16 a share that year. Indeed, HP’s printer business alone is valued at $21 a share, which means the market assigns almost no value to HP’s other businesses. Accordingly, the WSJ quotes one sage as observing “HP paid $19 billion for the privilege of hardly making any money in some of these other businesses.”
H’mm. As Professor Ribstein might observe, was the Compaq acquisition price so high that it took a near-delusional synergy theory for HP management to justify it?