UVA-F-1451

v. 2.5


This case was prepared by Anna D. Buchanan, under the supervision of Robert F. Bruner. It was written as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright 2004 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be
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electronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School
Foundation.



THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN


Reflecting on her prior analysis, Kathryn Macalester was comfortable with the pricing,
and believed there were strategic benefits to the proposed merger. Like all smart investors,
however, Macalester knew that the trade-off between deal terms and pricing could mean the
difference between success and failure. She had directed her research associate to gather
additional information specific to transaction structure, the exchange ratio, and other provisions
of the deal so she could assess the strengths and weaknesses of the proposed merger. Macalester
was working over the weekend to prepare for a Monday morning meeting with her partners, as
the funds vote on the merger proposal was due by 8:00 a.m. on Tuesday, March 19, 2002.


Summary of Terms

Under the terms of the merger agreement, each Compaq shareholder would receive
0.6325 share of HP common stock, resulting in an approximately 36 percent ownership of the
new company by former Compaq shareholders. The company was to retain the Hewlett-Packard
name, and the HWP ticker symbol would be changed to HPQ. Carly Fiorina, HPs chairman and
CEO, was to maintain those positions in the new company, and Michael Capellas, Compaqs
chairman and CEO, was to be named president of the new HP. The new board of directors
would have 11 members, with a maximum of two employee directors; six directors would come
from HP. Macalester reviewed the other significant deal terms regarding ownership and control,
as summarized by her associate (Exhibit 1).


Reverse-Triangular Merger

The merger was described as a tax-free reorganization, in which a Hewlett-Packard
subsidiary, Heloise Merger Corporation, was created solely for the purpose of merging with
Compaq. The supplemental research material provided to Macalester included a diagram of the
merger transaction (see Exhibit 2). Macalester was familiar with a reverse-triangular merger,
and she reflected on the pros and cons of such a deal structure. A reverse-triangular merger

UVA-F-1451

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would result in a tax-free reorganization in which HP would control substantially all of
Compaqs assets through a wholly owned subsidiary, thereby limiting HPs exposure to
Compaqs liabilities. The transaction would be tax free to HP, as long as the form of payment
for at least 80 percent of the consideration was paid with HP voting stock. Although a
shareholder vote of the target was required, a minority freeze-out could be accomplished, if
necessary. This form of transaction would limit HPs ability to sell or spin off assets
immediately before the transaction.
1



Exchange Ratio

In considering whether an appropriate exchange ratio was being offered, Macalester
studied the contribution analysis that had been prepared for her (see Exhibit 3). Based on a
variety of measures, the CPQ/HWP ratios were broadly distributed. In reviewing the Goldman
Sachs and Salomon Smith Barney fairness opinions (see Exhibit 4), Macalester paid particularly
close attention to each advisers assessment of the exchange ratio.


Acquisition Premium

On August 31, 2001, the last trading day before the September 3, 2001, announcement
date, HP and Compaq shares closed at $23.21 and $12.35, respectively, which implied an 18.9
percent premium at the 0.6325 exchange ratio. As of the February 4, 2002, proxy, when HP and
Compaq shares closed at $22.04 and $12.20, respectively, the implied premium was 14.3
percent. At the end of trading on Friday, March 15, 2002, HP and Compaq shares closed at
$19.05 and $10.33, respectively.


Merger of Equals

From the announcement date throughout the contentious campaign for shareholder votes,
Hewlett-Packard and Compaq executives touted the transaction as a merger of equals (MOE).
Fiorina and Capellas continued to describe the business combination as a mutually beneficial
marriage of two technology companies, each with different strengths and areas of contribution.
Perhaps aiming to downplay valuation differences or integration challenges, the CEOs as well as
members of their boards of directorsWalter Hewlett notwithstandingcontinued to describe
the deal as a merger of equals. Informed observers could be justifiably dubious of the MOE
characterization, whether euphemism or earnest intent. In spite of the terms presumably
positive intended consequences, Hewlett took issue with the merger of equals, and later stated
his view to the Council of Institutional Investors:


1
The description of a reverse-triangular merger presented in this section (as well as the diagram shown in
Exhibit 2) also appears in Applied Mergers & Acquisitions, by Robert F. Bruner (Hoboken, NJ: John Wiley & Sons,
2004), 55657, 560.

UVA-F-1451

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A merger of equals is the toughest kind of integration to pull off. It is much
harder than an acquisition, and certainly much harder than a spin-off. A spin-off
creates focus, creates winners, and doesnt require integration. In mergers of
equals there is invariably a battle for power, sometimes subtle at first but often
becoming quite blatant, and there is no reason to think it will be different this
time. Who will win two years from now? Texas or Silicon Valley? The Dallas
Morning News is already placing its chips on Michael Capellas, and the Houston
Chronicles technology columnist has said that Compaq would be better off
without HP and the huge problems integration would bring.
2


Macalester understood the MOE term to describe a merger of firms that are approximately equal
in size and where a low (or zero) acquisition premium is paid. By indicating that neither party is
strongly dominant in the combined companies, the term often conveys an attitude of teamwork
and cooperation. Although both acquirer and target benefit from the realization of synergies that
result from the merger, given the lower acquisition premium typically paid, the targets
shareholders are believed to bear more of the cost of an MOE structure.
3
While an MOE
structure might facilitate getting a deal done and be beneficial to HP shareholders in the short
term, Macalester wondered about the ramifications to HP of an MOE after the deal was
consummated.


Integration

As Macalester thoughtfully considered a merger of equals, she pondered both the
similarities and differences of the two companies and how the integration would play out.
Walter Hewlett and others had repeatedly claimed that technology mergers were particularly
susceptible to failure, given the difficulty of quickly and effectively combining two businesses
whose product life cycles were short and whose businesses were driven by fast delivery of
innovative products to market. Macalesters assistant had provided her with a few observations
on the integration of HP and Compaq (see Exhibit 5). As she reviewed the analysis before her,
as well as the section of the proxy statement that addressed integration (see Exhibit 6), she
questioned whether the HP and Compaq management teams presented a compelling case for
integration success.


Accretion/Dilution

Macalester turned her attention to the mergers impact on shareholder dilution. By
acquiring Compaq with equity, HP would be issuing more than a billion new shares of stock.
She studied the pro forma financial statements provided in the joint proxy/prospectus statement
(see Exhibits 7 and 8). Clearly, the merger would be dilutive if synergies were not realized.

2
Walter Hewlett, Council of Institutional Investors Presentation Comments, March 11, 2002, filed with the
SEC on March 12, 2002, p. 8.
3
This description of a merger of equals also appears in Bruner, Applied Mergers & Acquisitions, 67274.

UVA-F-1451

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Macalester reviewed the information on synergies valuation and revenue losses previously
provided by her associate. It would be important for her to quantify the mergers accretive value
to HP shareholders.


The Proxy Deadline Nears

After reviewing the deal terms and structure, Macalester prepared a list of additional
analyses required to assess fully the merits of the merger. Furthermore, in recommending how
her firm should vote its shares, she would need to summarize for her partners the significant
aspects of the transaction. Macalester made a to-do list:

1. Evaluate the deal terms.
2. Evaluate the exchange ratio and accretion/dilution impact.
3. Critique the merger of equals.
4. Evaluate the integration plan.
5. Decide how to vote.

Macalester was scheduled to meet with her partners in the morning to discuss the merger and
deliver her recommendation.




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Exhibit 1

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN

Summary Term Sheet

Announcement date September 4, 2001

Consideration
Form of payment Stock
Exchange ratio 0.6325 shares of HWP for each share of CPQ

Ownership
Ownership in merged company: 64% HP; 36% Compaq
Number of Hewlett-Packard shares issued (millions) 1,068
Ratio of former CPQ shareholders to HWP shareholders 1 to 1.8

Price
Market value per HWP share at 8/31/01 ($) 23.21
Market value per CPQ share at 8/31/01 ($) 12.35
Value of each CPQ share implied by exchange ratio ($) 14.68
Implied premium paid for CPQ shares 18.9%
Combined market capitalization 8/31/01 ($millions) 65,961
Market value per HWP share at 9/4/01 ($) 18.87
Market value per CPQ share at 9/4/01 ($) 11.08
Value of each CPQ share implied by exchange ratio ($) 11.94
Implied premium paid for CPQ shares 7.7%
Combined market capitalization 9/4/01 ($millions) 55,388

Tax and Accounting
Accounting method Purchase
Tax considerations Tax-free reorganization
Reorganization structure Merger of Equals
Merger method Reverse Triangular merger

Management, Board and Control
Company name of new firm Hewlett-Packard
Chairman and CEO Carly Fiorina (former HP Chairman & CEO)
President Michael Capellas (former Compaq Chairman & CEO)
Board of directors Resulting board of directors contained 11 members, with 5
directors from Compaq and no more than two employee
directors
Executive officers Six of 20 most senior executive positions occupied by
former Compaq executives
Corporate Headquarters Palo Alto, CA (company maintained a significant presence
in Houston, TX, for strategic R&D)
Voting Rights by former HP and Compaq shareholders 64% HP; 36% Compaq
Hewlett & Packard Families ownership 18.6% before; 8.4% after

Other
Shareholder vote Shareholder approvals from both parties were required
Termination fees $750 million by either party if either HP or Compaq:
a) was acquired by a third party
b) breached its representations and warranties
c) suffered a material adverse change
Ticker symbol change From HWP to HPQ
Synergies $2.0 billion was expected in fiscal 2003; annualized cost
savings of $2.5 billion by mid fiscal 2004

-6- UVA-F-1451

Exhibit 2

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN

Reverse-Triangular Merger

At Effective Time Result

Compaq Hewlett-Packard Hewlett-Packard





Merger


Stock (and cash for fractional shares)
Stock

Compaq Shareholders Heloise Merger Corp Compaq
Merger Sub Surviving Corporation


From summary section of HP/Compaq joint proxy statement/prospectus dated February 4, 2002
(page 7):

Under the terms of the merger agreement, a wholly owned subsidiary of HP will
merger with and into Compaq and Compaq will survive the merger as wholly
owned subsidiary of HP. Upon completion of the merger, holders of Compaq
common stock will be entitled to receive 0.6325 of a share of HP common stock
for each share of Compaq common stock they then hold. HP shareowners will
continue to own their existing shares of HP common stock after the merger. HP
currently intends to merge Compaq into HP as soon as reasonably practicable
following the merger.

From Article I of the Agreement and Plan of Reorganization by and among Hewlett-Packard
Company, Heloise Merger Corporation, and Compaq Computer Corporation, dated September 4,
2001:

At Effective Time, and subject to and upon the terms and conditions of this
Agreement and the applicable provisions of Delaware Law, Merger Sub shall be
merged with and into Compaq (the Merger), the separate corporate existence of
Merger Sub shall cease and Compaq shall continue as the surviving corporation.
Compaq, as the surviving corporation after the Merger, is hereafter sometimes
referred to as the Surviving Corporation.

-7- UVA-F-1451

Exhibit 3

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN

Contribution Analysis

Hewlett-
Packard Compaq
Ratio of
CPQ/HWP
Ratio of CPQ
to
(CPQ+HWP)
Ticker HWP CPQ
Primary location California Texas
Auditor E&Y PWC
Fiscal year-end 31-Oct 31-Dec
Employees 86,200 63,700 73.9% 42.5%
Selected Financial Data at 2001 FYE
Total assets ($ millions) 32,584 23,689 72.7% 42.1%
Total long-term debt ($ millions) 3,729 600 16.1% 13.9%
Total liabilities ($ millions) 18,631 12,572 67.5% 40.3%
Total stockholders equity ($ millions) 13,953 11,117 79.7% 44.3%
Sales ($ millions) 45,226 33,554 74.2% 42.6%
Gross profit ($ millions) 12,947 8,489 65.6% 39.6%
Gross-profit margin (%) 28.6 25.3 88.4% 46.9%
EBIT ($ millions) 2,030 479 23.6% 19.1%
EBIT margin (%) 4.5 1.4 31.8% 24.1%
Shares Outstanding
Basic (millions) 1,936 1,689 87.2% 46.6%
Diluted (millions) 1,974 1,689 85.5% 46.1%
Share Prices
07/31/01 $24.66 $14.94 60.6% NMF
08/31/01 $23.21 $12.35 53.2% NMF
09/28/01 $16.05 $8.31 51.8% NMF
10/31/01 $16.83 $8.75 52.0% NMF
11/30/01 $21.99 $10.15 46.2% NMF
12/31/01 $20.54 $9.76 47.5% NMF
01/31/02 $22.11 $12.35 55.9% NMF
Market Value ($000,000)
07/31/01 47,928 25,398 53.0% 34.6%
08/31/01 45,110 20,995 46.5% 31.8%
09/28/01 31,137 14,127 45.4% 31.2%
10/31/01 32,651 14,875 45.6% 31.3%
11/30/01 42,661 17,255 40.4% 28.8%
12/31/01 39,848 16,592 41.6% 29.4%
01/31/02 42,924 20,995 48.9% 32.8%
Proposed exchange ratio 0.6325

Source: Standard & Poors Research Insight 7.9, a division of the McGraw-Hill Companies, Inc.

UVA-F-1451

Exhibit 4

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MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN
Summary of Financial Advisers Fairness Opinions
Goldman Sachs & Co. Salomon Smith Barney
Role in Merger
Financial Advisor to Hewlett-Packard in the merger

Financial Advisor to Compaq in the merger
Previous Engagements
with HP
Co-manager on Agilent IPO, 1999
Manager of HP public debt offerings:
June 2000 ($1.5 billion)
July 2001 ($750 million)
July 2001 ($50 million)

Various unspecified.
Previous Engagements
with Compaq

Various unspecified financial advisory and securities services Various unspecified.
Advisors ownership of
HWP or CPQ securities
(in either proprietary or
custodial accounts)

451,315 shares HP
160,896 shares Compaq
$42.4 million in Compaq convertible bonds
Acknowledged but amounts not disclosed.
Items reviewed, analyzed
or accomplished in
connection with fairness
opinion
Merger Agreement
Previous five years of 10-K reports (HWP & CPQ)
Interim 10-Q reports and other reports to shareholders (HWP &
CPQ)
Other communications from HP and Compaq to shareholders
Internal financial analyses and forecasts for HP and Compaq
prepared by their respective managements, including estimates
of Synergies
Discussions with senior management of HP and Compaq
Trading history of HP and Compaq shares

Merger Agreement
Discussions with senior management of HP and Compaq
Publicly available financial information
Financial Forecasts and information provided by
management
Historical market prices, trading volumes, historical and
projected earnings, capitalization and financial condition of
Compaq and HP
Comparable transactions

Analyses conducted and
Exchange Ratios
calculated as a result of
analyses



Analyses conducted and
Contribution analysis (0.524 to 1.00)


Historical Exchange Ratio analysis (0.494 to 0.627)

Selected Companies analysis

Synergies analysis (WACC range of 10-14% and terminal value
growth rates of 0-4% resulted in a NPV $11.3-$24.5 billion for
Contribution analysis (0.617 to 0.764 based on EBIT and 0.491
to 0.565 based on net income)

Historical Exchange Ratio analysis (0.532 to 0.596)

Comparable Public Market Valuations

Synergies analysis (WACC range of 12.5-13.5% and terminal
value of 13.4-14.5 EBIT resulted in NPV of $28.3 to 31.2

-9- UVA-F-1451

Exhibit 4 (continued)
Goldman Sachs & Co. Salomon Smith Barney
Exchange Ratios
calculated as a result of
analyses (contd)
synergies)

Pro Forma Merger analysis (scenario analysis indicated merger
would be from 6.5% dilutive to 34.3% accretive in FY 2003)


billion)





Similar Transactions Premium analysis (0.585 to 0.680)

Precedent Industry Transaction Valuation analysis (0.637 to
0.863)

Disclaimer Relied on accuracy and completeness of financial and
accounting information, internal forecasts
Assumed estimates of Synergies provided by HP and Compaq
would be realized
No independent evaluation of assets or liabilities of HP or
Compaq
Assumed all regulatory consents and approvals would be
obtained

Relied upon accuracy and completeness of public data and
internal information
No view expressed with respect to forecasts or analyses
No likely trading range on stock implied
Relative merits of other alternatives not considered

Opinion
Based upon and subject to the foregoing and based upon such other
matters as we consider relevant, it is our opinion that as of the date
hereof the Exchange Ratio is fair from a financial point of view to
Hewlett-Packard.
Based upon and subject to the foregoing, our experience as
investment bankers, our work as described above and other
financial factors we deemed relevant, we are of the opinion that,
as of the date hereof the Exchange Ratio is Fair, from a financial
point of view, to the holders of Company Stock.

Fees
$5 million upon execution of Merger Agreement
$28 million upon completion
$500,000 at engagement
$9.5 million upon execution of Merger Agreement
0.25% of deal value (less $10 million described above)



Source: Joint proxy/prospectus statement dated February 4, 2002, pp. 6571, 7483.

UVA-F-1451

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Exhibit 5

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN

Integration Impact by Segment
Hewlett Packard
1
Compaq
2
Observations on Integration
Imaging and Printing (IPG)
Printers
Scanners
Supplies
No market presence Although there was no overlap with Compaq in imaging and printing, IPG would be
impacted by merger integration. For synergies to be completely realized, Compaqs
strengths in cost cutting and inventory management would need to be adopted by IPG.
Furthermore, R&D priorities and allocations would need to be revisited given the
companys more balanced product portfolio. With the new and improved end-to-end
product portfolio of HP overall, IPG would be one of four key segments of company
operations rather than the core.

Computing
Commercial PCs
Consumer PCs
Notebooks
Workstations


PC Servers
Unix Servers
Storage Products
Software
Access
Commercial PCs
Consumer PCs



Enterprise Computing
Industry Standard Servers
Business Critical Servers
Storage Products

Compaqs strength in PCs would rule in the integration of PC groups. Compaq had
successfully created a direct model in PCs and believed scale would enable it to maintain
market leader status, compete more effectively with Dell on costs, and return to
profitability.


In enterprise computing, HP and Compaq brought different strengths to the combined
company. Compaqs position was strong in the higher growth markets of industry standard
servers, business critical servers, and storage products. HP was strong in the slower
growing but higher margin Unix server market. Integration of the enterprise groups would
require a significant amount of strategic planning, careful R&D resource allocation, and
supply chain optimization for optimal merger synergies to be realized. Decision-making in
the area of enterprise computing would have a direct impact on the success of the
companys aim to rival IBM in offering customers a one-stop shop in enterprise
products.

IT Services
Support
Outsourcing
Education
Financial Services
Global Services
Support
Professional Services
Financial Services
At the proxy date, management believed HP and Compaq held the No. 8 and No. 9
positions, respectively, in IT services market share, and post-merger, management hoped to
claim the No 3 spot in services.
3
Integration here would probably be most challenging, as
neither company was a clear leader in this highly fragmented, competitive segment, and
success would depend somewhat on the companys successful integration of the enterprise-
computing group. Success in services was important to the companys goal to be a serious
competitor with IBM in end-to-end solutions.

1
Hewlett-Packard has three main operating segments: Imaging and Printing, Computing, and IT Services. For descriptive benefit to the reader, a few key product groups within each segment are
shown, which do not necessarily reflect actual organizational operating groups.
2
Compaqs three main segments of operations are Access, Enterprise Computing, and Global Services. For descriptive benefit to the reader, a few key product groups within each segment are
shown, which do not necessarily reflect actual organizational operating groups.
3
As described in managements package of presentation slides, HP Position on Compaq Merger, provided to shareholders and filed with the SEC on December 19, 2001.

-11- UVA-F-1451

Exhibit 6

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN

Integration Planning


The following description of HP and Compaqs integration plan is excerpted from page 113 of
the joint proxy statement/prospectus dated February 4, 2002:


HP recognizes the challenge inherent in integrating enterprises of the size and
complexity of HP and Compaq. HP also recognizes that a swift and successful integration of the
two companies is crucial to capturing the potential value of the merger. Accordingly, HP has
established an integration office that will report directly to Ms. Fiorina. This office will be run
jointly by Mr. McKinney and Mr. Clarke, each a key executive officer at HP and Compaq,
respectively. Mr. McKinney currently serves as the President of HPs Business Customer
Organization and provides a proven record as line manager and deep expertise in the HP
organization. Mr. Clarke currently serves as Compaqs Senior Vice President, Finance and
Administration, and Chief Financial Officer and provides his depth of knowledge of the IT
industry and of Compaq. Mr. Clarke also brings significant expertise in finance and general
corporate matters. The integration office now consists of more than 450 dedicated employees,
supported by advisors and divided into teams with specifically defined functions.

By the time of completion of the merger, the integration office plans to have established:

an operating model and organization to design and implement a transition plan and
provide internal clarity regarding asset and resources allocation and priorities, go-to-
market strategy and customer account responsibilities;
management structure, roles and responsibilities multiple layers into the organization, as
well as compensation and human resources policies, which we believe will encourage our
employees to focus on business performance and avoid the distraction of personal and
organizational uncertainty;
clear product roadmaps and investment protection programs, which we believe will give
our customers a high degree of confidence in our ability to meet or exceed their business
requirements without disrupting their existing relationship with us or their installed
technology platform; and
standard policies, practices, and procedures to govern our relationships with our partners
and facilitate a smooth transition of our respective commercial arrangements to the
combined company.

UVA-F-1451

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Exhibit 7

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN

Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet of HP and Compaq
October 31, 2001
(in millions)
Historical
--------------- Pro Forma Pro Forma
HP Compaq Adjustments/(1)/ Combined
------- ------- --------------- ---------
Assets
Current assets:
Cash and cash equivalents.......................... $ 4,197 $ 3,940 $ -- $ 8,137
Short-term investments............................. 139 -- -- 139
Accounts receivable, net........................... 4,488 4,780 -- 9,268
Financing receivables, net......................... 2,183 1,076 -- 3,259
Inventory.......................................... 5,204 1,582 50 (a) 6,836
Other current assets............................... 5,094 3,291 -- 8,385
------- ------- ------- -------
Total current assets........................... 21,305 14,669 50 36,024
Property, plant and equipment, net.................... 4,397 3,244 1,100 (b) 8,741
Long-term investments and other assets................ 6,126 4,224 (2,366)(c) 7,984
Amortizable intangible assets, net.................... 89 1,451 2,649 (d) 4,189
Goodwill and intangible assets with indefinite lives.. 667 220 11,363 (e) 12,250
------- ------- ------- -------
Total assets................................... $32,584 $23,808 $12,796 $69,188
======= ======= ======= =======
Liabilities and stockholders' equity
Current liabilities:
Notes payable and short-term borrowings............ $ 1,722 $ 1,501 $ -- $ 3,223
Accounts payable................................... 3,791 3,619 -- 7,410
Deferred revenue................................... 1,867 1,170 (220)(f) 2,817
Other accrued liabilities.......................... 6,584 4,493 150 (g) 11,227
------- ------- ------- -------
Total current liabilities...................... 13,964 10,783 (70) 24,677
Long-term debt........................................ 3,729 600 -- 4,329
Other liabilities..................................... 938 1,185 1,256 (h) 3,379
Total stockholders' equity............................ 13,953 11,240 11,610 (i) 36,803
------- ------- ------- -------
Total liabilities and stockholders' equity..... $32,584 $23,808 $12,796 $69,188
======= ======= ======= =======

(1) The letters refer to a description of the adjustments in Note 2 of the accompanying notes to unaudited pro forma condensed combined
consolidated financial statements which appear in the joint proxy/prospectus statement dated February 4, 2002.


Source: Joint proxy/prospectus statement dated February 4, 2002.

UVA-F-1451

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Exhibit 8
THE MERGER OF HEWLETT-PACKARD AND COMPAQ (B):
DEAL DESIGN
Unaudited Pro Forma Condensed Combined Consolidated Statement of Earnings of HP and Compaq
for Year Ended October 31, 2001
(in millions, except per share amounts)
Historical
---------------- Pro Forma Pro Forma
HP Compaq Adjustments/(1)/ Combined
------- ------- --------------- ---------
Net revenue:
Products................................................... $37,498 $29,834 $ -- $67,332
Services................................................... 7,325 6,505 -- 13,830
Financing income........................................... 403 168 -- 571
------- ------- ------ -------
Total net revenue...................................... 45,226 36,507 -- 81,733
Cost and expenses:
Cost of products sold/(2)/................................. 28,370 23,485 110 (j) 51,965
Cost of services........................................... 4,870 4,718 -- 9,588
Financing interest......................................... 234 114 -- 348
Research and development................................... 2,670 1,390 -- 4,060
Selling, general and administrative/(2)/................... 7,085 5,657 20 (b) 12,762
Restructuring and related charges.......................... 384 656 -- 1,040
Amortization of intangible assets.......................... 12 302 298 (d) 612
Amortization of goodwill................................... 162 29 -- 191
------- ------- ------ -------
Total cost and expenses................................ 43,787 36,351 428 80,566
------- ------- ------ -------
Earnings from operations...................................... 1,439 156 (428) 1,167
Interest and other, net....................................... (737) (2,116) -- (2,853)
------- ------- ------ -------
Earnings (loss) from continuing operations before taxes....... 702 (1,960) (428) (1,686)
Provision (benefit) for taxes................................. 78 (588) (150)(k) (660)
------- ------- ------ -------
Net earnings (loss) from continuing operations/(3)/........... $ 624 $(1,372) $ (278) $(1,026)
======= ======= ====== =======
Net earnings (loss) per share from continuing operations/(3)/:
Basic...................................................... $ 0.32 $ (0.81) $ (0.34)
======= ======= =======
Diluted.................................................... $ 0.32 $ (0.81) $ (0.34)
======= ======= =======
Average number of shares and share equivalents:
Basic...................................................... 1,936 1,689 3,004
Diluted.................................................... 1,974 1,689 3,004

(1) The letters refer to a description of the adjustments in Note 2 of the accompanying notes to unaudited pro forma condensed combined
consolidated financial statements which appear in the joint proxy/prospectus statement dated February 4, 2002.
(2) Historical amounts for amortization of intangibles and goodwill have been reclassified to separate line items.
(3) Net earnings (loss) and net earnings (loss) per share from continuing operations are presented before extraordinary items and cumulative
effect of change in accounting principle.
Source: Joint proxy/prospectus statement dated February 4, 2002.