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Will Compaq's Downturn Nix HP Deal?
News of a drastic third-quarter revenue shortfall from Compaq Computer Corp. (NYSE: CPQ) (see Compaq Lowers Expectations) has prompted financial analysts to slash earnings estimates for this year and next. And it looks like the warning, issued after Monday's market close, could derail the enterprise computer and storage giants pending merger with Hewlett-Packard Co. (NYSE: HWP).
Although both companies insist the merger is on track, Compaqs stock price is now trading at a 15 percent discount relative to the merger valuation. The proposed merger, announced a month ago (see Compaq/HP Hairball), calls for HP to swap 0.6325 of a share for each share of Compaq.
Typically, when investors expect a merger to be consummated, the stocks will trade very close to the merger valuation, usually within 5 percent. The current trend, coupled with a situation in which more than half of HP's stock is owned by institutional invenstors, indicates investor sentiment could apply pressure to call off the deal.
Compaq CEO Michael Capellas blamed various factors for the revenue shortfall, including the September 11 terrorist attacks and tropical storms in Asia. (And how'bout that Mad Cow thing? Couldn't have helped.) Although Compaq will not officially announce third quarter results until around the middle of this month, Capellas said he expects revenues to be $7.4 billion to $7.5 billion, or a sequential drop of 12 percent. He predicts an operational loss of 5 to 7 cents a share. And the company plans to take a $500 million non-cash charge for the quarter, due to losses on its investment in Internet company CMGI Inc.
Analyst Ashok Kumar, of U.S. Bancorp Piper Jaffray, in a research note titled Dr. Kevorkian, Where Art Thou? slashed his estimates for Compaq for the second half of this year. His previous projections of 40 cents earnings per share on $21 billion revenues are now down to a 7 cent per share loss on $15 billion revenues. Likewise, he cut 2002 estimates from 60 cents per share earnings on $43 billion revenues to 10 cents per share on $32.5 billion revenues.
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