Filed by Hewlett-Packard Company Pursuant to Rule 425
Under the Securities Act of 1933
And Deemed Filed Pursuant to Rule 14a-6
Under the Securities Exchange Act of 1934
Subject Company: Compaq Computer Corporation
Commission File No.: 333-73454
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 the text of a letter sent by HP to HP shareowners.
[HP INVENT LOGO]
February 19, 2002
Dear HP Shareowner,
Our pending merger with Compaq has one overriding purpose: to create a more
competitive HP with a stronger market position, higher revenues, increased
profits and, most importantly, enhanced shareowner value.
Below are answers to numerous questions that have been asked about the
merger. We hope these answers will help explain how the merger will enable us
to address the future from a position of greater strength. For additional
information about the merger, we encourage you to visit VotetheHPway.com.
Q. WHY DOES HP NEED TO TAKE THIS DECISIVE STEP?
The technology industry is in the midst of transformation. We are entering
an era in computing in which everything works with everything else, everywhere,
all the time, where end-to-end solutions matter most, where size makes a
difference.
The simple fact is we have real strengths -- in imaging and printing, UNIX
servers, consumer PCs and IT services. But we need to bolster other areas of
our business -- storage, Windows servers and commercial PCs.
In a February 2002 independent survey of IT professionals, 86% of the
approximately 2,300 HP and Compaq customers responding indicated that the
ability to offer end-to-end solutions was an important attribute in selecting a
preferred technology provider.
After nearly two decades of organic growth and tactical acquisitions, we
need to lead in this next computing era. To do so, we must take decisive action
to strengthen our market position in key businesses or be left behind. In one
strategic move, our pending merger with Compaq will fill critical gaps in our
current portfolio and improve our market position in key business categories.
We are convinced the merger will significantly improve our operating margins in
enterprise computing (from -3% in FY01 to +9% in FY03), personal computers and
access devices (from -4% in FY01 to +3% in FY03) and IT services (from 5% in
FY01 to 14% in FY03).
According to a recent McKinsey & Co. Quarterly report, "High technology is
a 'winner- takes-all' industry. Transactions and consolidations can often fill
holes in a product line, open new markets, and create new capabilities in less
time than it would take to build businesses internally. Such moves may be
prerequisites to achieving a dominant position -- the best assurance of
survival."
Q. SPECIFICALLY, HOW DOES COMPAQ STRENGTHEN HP's BUSINESSES?
Compaq materially strengthens many of our businesses, specifically our
server, storage, PC and IT services and support businesses, which are becoming
increasingly interrelated to each other and to our imaging and printing
franchise.
SERVERS: Today we have a strong position in UNIX servers, a market growing
at 5-7% annually. With Compaq, we also become #1 in both Windows and Linux
servers, markets growing at 20% and 30% respectively. We need a
market leading position in each of these server categories in order to be a
successful end-to-end systems and solutions provider.
HIGH-PERFORMANCE COMPUTING: Compaq is #1 in high-performance computing for
customers like the world's stock exchanges and AOL. Compaq's Himalaya high-end
computing systems with our super-fast Superdome high-end UNIX server will give
us market-leading strength in this high margin segment, with better access to
big, new customers like the Department of Defense and the U.S. Postal Service.
STORAGE: While we have important assets in high-end enterprise storage, we
don't have enough to lead. With Compaq, we will become #1 in storage systems in
the world, on a revenue basis, including the fastest growing segment of the
storage market -- storage area networks -- a market growing at 34%.
SERVICES: Compaq will double our service and support capacity,
particularly in the area of mission critical infrastructure design, outsourcing
and support. More is better in the support business, because it produces
reliable, double-digit operating margins quarter after quarter.
PCs: Our consumer PC business is profitable and market leading. Our
commercial PC business lacks effective direct distribution. Compaq has a
successful commercial PC business and has built an effective direct
distribution channel -- an area of weakness for us. In fact, in a February
2002, independent survey of IT professionals, 72% of the approximately 2,300 HP
and Compaq customers responding indicated that having direct PC distribution
capabilities is an important attribute in selecting a PC provider. Today, where
Dell does 70% of its commercial business through the direct channel, and Compaq
does 70% of their U.S. commercial business direct, we do just 15%. Where Dell
achieves 70 inventory turns, Compaq does 62, our inventory turns are just 25
per year. Combining our strengths in the consumer PC businesses with Compaq's
strength in commercial PCs will enable us to create a profitable PC business
overall and an important channel for our other products and services.
Q. HOW DOES COMPAQ GIVE HP MARKET LEADERSHIP?
The merger will move us into a market leading position in key and fast
growing segments of the $800 billion enterprise systems and services market.
HP HP+
ALONE COMPAQ
----- ------
Enterprise Storage #5 #1
Windows(R)Servers #4 #1
Unix Servers #2 #1
Linux Servers #4 #1
PCs #3 #1
Management Software #1 #1
Printing and Imaging #1 #1
IT Services #8 #3
Additionally, we will double the size of our sales force to 15,000, and
increase our R&D investment from $2.7 billion to $4 billion.
In our business, leadership counts. Leadership means more customers, higher
revenues, increased profits, and more innovation and, ultimately, enhanced
shareowner value.
Q. HOW WILL THE MERGER INCREASE SHAREOWNER VALUE?
Even based on our conservative estimates, the merger is a financially
compelling opportunity that we expect to increase our earnings and
profitability after our first full year of combined operations with Compaq.
Specifically, we expect the following:
. The merger will generate annual cost savings of at least $2.5 billion,
which have a net present value of $5 to $9 per HP share, based upon the
assumptions described in our proxy statement/prospectus.
. The merger will substantially increase our earnings per share (based on
assumptions described in our proxy/prospectus) by 13% by fiscal 2003.
. The merger will improve the profitability of many of our businesses,
resulting in significant improvements to our overall operating margin
from 3% in fiscal 2001 to 9% by fiscal 2003.
We believe that these financial benefits ultimately will enhance shareowner
value.
Q: HOW WILL THIS MERGER AFFECT HP's PRINTING AND IMAGING FRANCHISE?
Our commitment to our printing and imaging business has never been greater.
Indeed, we see this area as one of the key beneficiaries of the combination.
Improving profitability in our enterprise computing, IT services and PC
businesses will make them self-funding. Continued growth in printing and
imaging means creating new categories such as digital publishing and digital
imaging. These growth markets, $400 billion and $60 billion markets
respectively in their own right, are greatly enhanced by our interrelated
capabilities in computing storage, servers and network management.
Q. ARE PCs A BAD BUSINESS?
Personal computers are a vital piece of the overall solution our customers
demand. Digital imaging, for example, which is a great growth opportunity for
our imaging and printing business, is made much easier and will be adopted much
faster with PCs. PCs also provide important benefits in the way of brand
visibility and strong industry partnerships. Our consumer PC business generates
positive 3% operating margins, but our commercial PC business remains
unprofitable because we lack a competitive cost structure and the direct
distribution model to compete effectively. By combining our PC business with
Compaq's, we expect PCs will become a significant cash generator and provide a
mid-teens return on invested capital. Since PCs are an important value driver
for our customers, it's important that we make our overall PC business healthy
and profitable by adding scale and direct distribution capability.
Q. HOW DOES THIS MOVE HELP HP COMPETE IN IT SERVICES?
We will have more than 65,000 IT service and support professionals --
doubling the size of our support, outsourcing, and consulting resources
overnight -- and the associated depth and breadth necessary to serve the
largest, global corporate customers. Support is the most profitable portion of
the services business and outsourcing is the fastest growing. Few other IT
services providers in the world can offer as global or comprehensive a set of
service and support capabilities and we will build this highly profitable and
steady business from that base.
Q. CAN THIS MERGER BE SUCCESSFUL WHEN OTHERS IN THIS INDUSTRY HAVE FAILED?
Technology mergers have failed when companies have sought diversification
not consolidation. Many have been done at the top of business cycles not the
bottom. Many had no detailed pre- or post-close integration plans.
The technology industry is consolidating: and current industry dynamics are
much more akin to the mature phases of other industries where mergers are not
only viable, but necessary.
Industries like pharmaceuticals, financial services, telecom and aerospace
are examples. Some common threads run through successful mergers:
. The combination is about bringing like businesses together, not making
forays into new businesses;
. The combination helps to achieve clear market leadership;
. The deal is stock only, providing a stronger post-merger balance sheet;
. The combination results in significant cost savings; and
. The combination meets the criteria for smooth and effective integration.
This is a merger of like businesses coming together -- a merger of
consolidation, not
diversification. Our basic technology is more than compatible; it is almost
completely complementary.
The timing of this transaction is also important. Unlike so many others in
the high tech arena, we're doing this merger at the near bottom of a market
cycle not the top. That means that valuations are fair, customers aren't making
major IT investments, and our competitors are dealing with business model
challenges of their own as they adjust to lower overall industry growth rates.
Most importantly, our employee base is stable. Attrition at HP and Compaq are
near all-time lows.
We're not leaving anything to chance. A group of more than 450 dedicated
people, drawn from HP and Compaq, have been working around the clock to prepare
for the integration of HP and Compaq by analyzing past mergers and drawing upon
best practices and experiences to make the right integration decisions for the
new company. In particular, our integration team is drawing on our very direct
experience spinning out Agilent Technologies, as well as Compaq's acquisitions
of Digital Equipment Corporation and Tandem. Our integration team is also
working with people who have been directly involved in numerous mergers and
acquisitions, and who know what makes the difference between success and
failure in transactions of the scale and complexity of this merger.
Q. HAVE YOU LOST CUSTOMERS SINCE YOU ANNOUNCED THE MERGER?
In the two quarters we've reported earnings since we announced the merger
with Compaq, we've seen revenue increase -- a good indicator of customer
loyalty. Our integration plans ensure an unyielding focus on customers during
the pre- and post-close integration planning process. Within the first 30 days
that we begin operating as a single company, for customers we will have:
. Clear product roadmaps in place to give customers comfort and assurance;
. Customer account assignments identified to insure clarity and
accountability in the sales force and other points of contact such as
websites and service centers;
. And the operational and management structure in place to ensure that
employees will have a clear understanding of their roles and
responsibilities.
Q. WHY IS THE HP BOARD RECOMMENDING THAT I SUPPORT THE MERGER?
The merger represents the collective judgment of your Board of Directors,
six of whom are independent directors, who together with HP management,
represent three centuries of combined business and technology industry
experience.
. Phil Condit, the CEO of Boeing, who managed Boeing's acquisition of
McDonnell Douglas, Hughes space division and Rockwell's defense and
aerospace business -- moves that transformed the aerospace industry.
(Director since 1998)
. Sam Ginn, former chairman of Vodafone, who managed the merger of Air
Touch and Vodafone and the spin-off of Pacific Telesis from AT&T.
(Director since 1996)
. Dick Hackborn, a 30-year HP veteran who worked alongside Bill Hewlett and
Dave Packard and built HP's imaging and printing business. (Director
since 1992)
. Patty Dunn, who as head of Barclays Global Investors, manages $800
billion dollars in investor assets. (Director since 1998)
. Jay Keyworth, chairman and senior fellow of the Progress and Freedom
Foundation and former director of the White House Office of Science and
Technology, was a long-time friend and advisor to Dave Packard. (Director
since 1986)
. Bob Knowling, who transformed Ameritech and was tapped to help manage
their acquisition of GE Information Services. (Director since 2000)
Your Board, together with the HP management team, spent more than 2 1/2
years evaluating our strategic alternatives. They considered numerous
possibilities and unanimously concluded that our pending merger with Compaq is
the best way to create value for our shareowners.
Q. DOES HP's RECENT FINANCIAL PERFORMANCE SUGGEST THAT HP WOULD BE BETTER OFF
ON ITS OWN?
HP people deserve tremendous credit for staying focused on customers and
managing costs in a very tough environment.
But the hard work and heavy lifting over the past 2 1/2 years have built a
platform for market leadership. They weren't the end goal. We're missing
essential ingredients for success -- we're missing market leadership positions
and profitability in our commercial PC business, and across many parts of our
enterprise computing business. We're also missing depth and breadth in key
growth segments like storage and IT services.
As Merrill Lynch's chief technology analyst Steve Milunovich said in the
Feb. 14 issue of THE WALL STREET JOURNAL, "It was an impressive quarter [except
that] HP's enterprise business remained troublesome -- which is why they need
to merge with Compaq."
Q. WHAT HAPPENS IF THE MERGER IS NOT APPROVED?
If we had to go back to the drawing board, we would face the same set of
choices, the same set of challenges and the same set of alternative solutions
we face today. The only thing we would lose is time. And that's the one thing
none of us in this industry can afford to lose; it's the one thing we can never
get back. Your Board of Directors weighed our alternatives vigorously and
concluded that this merger is the very best way to enhance shareowner value.
Q. IS THIS MERGER CONSISTENT WITH "THE HP WAY"?
As Bill Hewlett and Dave Packard often said, profitability is the key to
job preservation, to investment in R&D and innovation, and contribution to the
community -- and these things are all key to making HP both a special place to
work and a valued corporate citizen around the world. While many things have
changed since Bill and Dave walked the halls of HP, many things have remained
vitally the same -- especially their fundamental belief in sound business
practices; their intense desire to serve customers; their respect for a
meritocracy based on performance, their understanding that people want to work
at a company where they can make a contribution; and their belief that
inventive, useful products can indeed change the world.
The merger with Compaq is an opportunity to control our destiny, fill the
gaps in our portfolio, build a competitive cost structure where we urgently
need it, and allow us to accelerate our strategy and achieve our goal of market
leadership.
The genius of the HP Way is that it's a legacy built on innovation, bold
enough to embrace change and flexible enough to absorb it.
We hope this answers your questions.
Your vote is critically important. Please sign, date and return your WHITE
proxy card or voting instruction form today voting "FOR" the merger.
/s/ ROBERT P. WAYMAN
Robert P. Wayman
Chief Financial Officer
Hewlett-Packard Company
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If you have questions or need assistance voting your shares FOR the HP/Compaq
merger, please call INNISFREE M&A INCORPORATED toll-free at (877) 750-5836 or
GEORGESON SHAREHOLDER toll-free at (888) 921-5724. Additional information
about the HP/Compaq merger is available at www.VotetheHPway.com.
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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 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.