|
Carly strikes back
|
 |
November 14, 2001: 2:39 p.m. ET
Hewlett-Packard reports stronger than expected earnings. But its planned merger with Compaq still doesn't make much sense.
MONEY columnist David Futrelle
|
NEW YORK (CNN/Money) - Hewlett-Packard's street-beating earnings announcement before the start of trading Wednesday reminded me of every hokey, formulaic Hollywood action movie I've ever seen. You know how these things go: The movie starts out with something going horribly awry. Our hero struggles to set things right, facing obstacle after obstacle and defeat after defeat. Then, about two-thirds of the way into the flick, when things look like they couldn't possibly get any worse, our hero somehow summons up the resolve to continue on in the face of almost certain doom. A couple of car chases and/or shootouts later you get your happy ending.
HP's real-life drama
I doubt Hewlett-Packard's real life melodrama will wrap itself up quite so neatly. But otherwise, Hewlett-Packard's officers are following the Hollywood formula to a T. In early September, H-P CEO Carly Fiorina and Compaq CEO Michael Capellas announced what they thought would be a blockbuster merger. Since then, analysts and investors have savaged the deal's shaky logic, and both companies have watched their share prices plummet. In late October, Compaq announced weaker-than-expected third quarter earnings, blaming the results on everything from Asian typhoons to the distractions caused by the planned merger. Now, in a sort of crowning indignity, members of both the Hewlett and Packard families have come out against the merger, and more than a few observers have suggested that Fiorina herself could soon be out of a job.
But Fiorina isn't giving up so easily. Wednesday morning, H-P announced fourth quarter earnings (excluding some items) of $361 million, or 19 cents a share, handily beating Wall Street expectations of 8 cents a share; net income was 5 cents a share. While the results were down markedly from the 41 cents a share the company earned a year earlier, they were good enough to inspire a more than 10 percent spike in the stock in early morning trading; Compaq saw an even bigger spike as investors concluded that H-P's surprisingly decent results made it more likely that the two companies' planned merger will actually go through. Fiorina credited "excellent execution in imaging and printing and good performance in services" for the better-than-expected results, along with cost reductions and better inventory management. H-P reaffirmed its plans to go ahead with the merger, saying it intends to file detailed plans with the SEC shortly.
A temporary truce
The better-than-expected results may temporarily silence some of Fiorina's critics -- and dramatically improve the chances that the merger will go through in the end. (The spread between H-P's and Compaq's share prices has narrowed, suggesting investors see the deal as more likely.) But the logic behind the merger is as shaky as it ever was. Sure, H-P may be doing better than expected, but Compaq is doing worse; tying an already weak H-P to an even weaker Compaq won't exactly make its struggle any easier.
Fiorina says that the merger is the "best way" for her company to grow. But the kind of growth the deal brings isn't the kind of growth H-P needs. At a time when the company should be thinking about cutting back or even eliminating entirely its unprofitable PC business, the deal would, as the Hewlett family itself has complained, "significantly increase Hewlett-Packard's exposure to PCs -- an area that is neither growing nor profitable." And Compaq's much touted "services" business is focused mostly on the unglamorous business of support, not the high-end consulting business that could actually help H-P.
Fiorina has shown herself to be tougher than many of her critics have assumed. But all the toughness in the world won't transform a nonsensical deal into one worth doing. 
|
|
|
|
|
|
|
