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Rating Action:

MOODYS AFFIRMS RATINGS OF HEWLETT-PACKARD AND COMPAQ COMPUTER; COMPAQ RATINGS PRESSURED IF MERGER CANCELLED

07 Nov 2001
MOODYS AFFIRMS RATINGS OF HEWLETT-PACKARD AND COMPAQ COMPUTER; COMPAQ RATINGS PRESSURED IF MERGER CANCELLED New York, November 07, 2001 -- Moody's Investors Service affirmed the credit ratings of both Hewlett-Packard Company (senior unsecured A2 and short term rating Prime-1 both with negative outlook) and Compaq Computer Corporation (senior unsecured Baa2 and short term rating Prime-2 under review for possible upgrade as a result of the pending merger) following yesterday's dissent by a major HP shareholder to the planned stock merger of the two companies.

Notwithstanding the dissent of certain shareholders, both boards of directors and management teams yesterday reiterated their commitment to the transaction, which remains subject to regulatory and shareholder approvals. In affirming the ratings of both HP and Compaq, Moody's said that should obtaining necessary approvals become highly unlikely, or if the merger plans are cancelled, it is probable that HP would retain its existing ratings and negative outlook, while the credit ratings of Compaq would likely be pressured, with downside potential likely limited to one notch over the near term.

The rating agency said that for HP, potential cancellation of the merger plans would likely cause further executional turmoil and management uncertainty. When combined with existing operational challenges throughout its business portfolio, the competitive inroads being made while management is focused on the pending merger and then also during post merger regrouping activities, as well as the extremely difficult market conditions, the ability of HP to retain its credit ratings could be weakened.

Although a cancellation of the merger with Compaq would eliminate the huge integration challenges, in Moody's view, it would then raise further questions about HP's ability to affect its strategy of providing a more complete set of end to end IT solutions and services. Nevertheless, while the two notch downgrade by Moody's in early September 2001, following a one notch downgrade in June 2001 incorporated most of these challenges, the negative ratings outlook for HP is driven by ongoing concerns regarding business execution, the overall strength of the HP franchise, as well as potential management uncertainty.

Regarding Compaq, Moody's said that the ratings are currently under review for possible upgrade solely as a result of the merger announcement. The ratings outcome is subject to merger completion, a clarification of the implicit and explicit financial support from the merged enterprise that would accrue to current Compaq bondholders, as well as the evolving performance outlook of both HP and Compaq.

As an independent entity, Moody's believes that Compaq's credit profile is weakening even though it continues to maintain a liquid and modestly leveraged balance sheet. Notwithstanding modest profit improvement in its services segment, which represents about 23% of the company's revenues through nine months this year, Compaq continues to lose money in its enterprise and access hardware businesses, which include servers, storage devices, PCs and other Internet access devices. The company has incurred significantly diminished profitability over the last year, and losses in three of the last four quarters with another loss likely in the current fourth quarter. Moody's is concerned about Compaq's ability to reduce its cost structure to consistently and profitably compete in its hardware businesses.

Hewlett-Packard Company, based in Palo Alto, California, designs, manufactures, and services computing and imaging systems and provides information technology consulting services.

Compaq Computer Corporation, based in Houston, Texas, is a leading provider of enterprise computing systems and solutions.
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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