HP Shares Rise After Merger, But Challenges Loom

Hewlett-Packard (NYSE: HPQ) shares inched up Monday on news that the company has completed its merger with Compaq. Shares rose 78 U.S. cents, or 4.47 percent, to close at $18.22 as company stock traded under the new ticker symbol HPQ on the New York Stock Exchange.

In anticipation of the merger's completion, analyst Sanford C. Bernstein had boosted the company's rating from market perform to outperform, but Bear Sterns analyst Andrew Neff kept the company's rating at neutral in a research note issued Monday.

The mixed reactions reflect a variety of concerns among analysts. Even though the merger created a US$22 billion computing powerhouse, the company still faces an uphill climb in a marketplace hit hard by the sagging economy and still struggling to right itself. And there is no guarantee that the new HP will operate any better than the old one did.

'Major Upheaval'?

One factor stoking the fires of uncertainty is an impending 10 percent reduction in HP's workforce, which will leave 15,000 people without a job and surely will influence the company's financial picture in the months to come.

In addition, Aberdeen Group chief research officer Peter Kastner told the E-Commerce Times that he expects a "major upheaval in the company's sales force" will put a different team of people in front of customers.

Kastner noted that the two companies' top accounts "are largely exclusive" and that some accounts that once were ranked as Tier 1 "will be dropped down to Tier 2." Such a move could anger affected customers.

The merger also will open the door for Compaq customers, if they are big enough, to renegotiate the legal terms of their relationships. Customers will get "new master contracts from HP," according to Kastner.

Clouds on Horizon

Moreover, HP executives are likely to be plagued by a cloud of legal and regulatory review following the public beating they took over the merger vote.

"Enough stuff came out in court to certainly color [HP's actions]. HP will have to do a lot to dig out," Giga Information Group analyst Rob Enderle told the E-Commerce Times.

Disgruntled former board member Walter Hewlett had accused executives, particularly HP CEO Carly Fiorina, of improperly influencing the votes of major shareholders, including Deutsche Bank.

Fiorina and other executives held an eleventh-hour meeting with Deutsche Bank decision makers and vowed in e-mail messages to do what was necessary to convince them to vote for the merger, but Hewlett failed to prove any wrongdoing, according to Delaware Judge William Chandler.

Federal Probe Continues

The U.S. Securities & Exchange Commission and federal prosecutors in New York launched separate probes into the voting process, although the SEC said late last week that it is dropping its investigation.

Enderle noted that the federal prosecutors will have more time than Walter Hewlett did to investigate how HP executives might have used their influence in the voting process. And Kastner pointed out that the U.S. attorney's investigation is "potentially the most troubling" because it is "potentially criminal.".

"Anything that distracts management will take away from the end result," he said.

The newly merged company must find its way through the investigative mire if it is to emerge steady and relatively unscathed.