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05 Sep 2001
MOODY'S LOWERS LONG TERM RATINGS OF HEWLETT-PACKARD (SENIOR TO A2). RATINGS OUTLOOK NEGATIVE. COMPAQ COMPUTER RATINGS UNDER REVIEW FOR POSSIBLE UPGRADE (SENIOR AT Baa2 AND SHORT TERM AT PRIME-2)
Moody's Investors Service lowered the long-term ratings of Hewlett-Packard Company (HP) to A2 from Aa3 and retained a negative ratings outlook. Concurrently, Moody's placed the Baa2 long term rating and Prime-2 short term rating for commercial paper of Compaq Computer Corporation under review for possible upgrade. The rating action follows the news today that both board of directors have approved a plan to combine the companies in a stock for stock merger valued at approximately $20 billion as of the end of the day following its announcement. Subject to regulatory and shareholder approvals, closing is expected by the first half of fiscal 2002. The rating downgrade reflects the weakening operating outlook for Hewlett-Packard and the incremental operational risks entailed in executing the integration of both businesses.
The ratings review for Compaq Computer will focus on the ultimate consummation of the proposed merger as well as the legal structure of the combined entity, including potential assumption or guarantees of existing Compaq debt by Hewlett-Packard. The ongoing ratings of Hewlett-Packard will continue to focus on its operating performance between now and closing of the merger as well as the integration, operational, and financial strategies of the combined businesses, and the significant execution challenges and potential benefits associated therewith.
Moody's said that the planned merger would result in an $87 billion latest twelve month revenue firm with strong to leading market shares in a number of product areas. However, both companies have experienced declining revenues and profitability over the last year with weak operating outlooks over the intermediate term and uncertainty as to when demand may ultimately pick up, and the pace of such pick up when it does occur. Combined revenues in the latest fiscal quarters (July for HP and June for Compaq), declined by 15% to $18.8 billion while operating profit excluding restructuring charges fell to $263 million from nearly $1.9 billion in the year earlier periods.
As stand alone entities, both companies continue to struggle with a number of issues, including the weakening macro economic environment, weak corporate demand, softening consumer demand, intensifying pricing pressure, as well as the current implementation of their own restructuring and reinvention efforts aimed at reducing costs and expanding revenues. Both companies have announced multiple or revised restructuring plans over the last year. In Moody's view, full, successful integration of the companies' product and service offerings and roadmaps, manufacturing facilities, sales forces, and information technology platforms will be a very challenging undertaking whose ultimate sustainable success is uncertain.
Ratings lowered include:
Hewlett Packard Corporation:
Long-term senior unsecured: to A2 / (P) A2 from Aa3 / (P) Aa3
Long-term subordinated: to A3 / (P) A3 from A1 / (P) A1
Preferred stock (shelf): to (P) Baa1 from (P) A2
Hewlett Packard Finance Corporation
Long-term senior unsecured: to A2 from Aa3
Ratings under review for possible upgrade include:
Compaq Computer Corporation:
Long term senior unsecured debt at Baa2 / (P) Baa2
Long term senior unsecured bank debt at Baa2
Short term rating for commercial paper at Prime-2.
Compaq Financial Services Corporation (Guaranteed by Compaq Computer Corpration):
Short term rating for commercial paper at Prime-2.
The downgrade also reflects Moody's expectation that the integration efforts during the planned 6 to 9 month approval process will lead to further operational turmoil, potential customer disruption, and it will also provide an opportunity for competitors to gain business from each of HP and Compaq customer bases. Moreover, management expects that revenue may decline by about 5% for the combined businesses during the each of 2002 and 2003, further underscoring the urgency of removing costs from operations.
Although management expects the combined businesses to comfortably achieve cost reductions of $390 million in the partial year of 2002, $2.0 billion in fiscal 2003, and $2.4 billion by fiscal 2004, Moody's believes it will be challenging both to achieve these cost reductions and also to keep a meaningful portion of these anticipated savings without reinvesting them or effectively surrendering them to the marketplace by way of pricing.
The rating agency went on to say that both company's balance sheets continue to represent modest financial risk. Pro forma cash of $7.1 billion compares to about $7.6 billion of debt, most of which supports the customer finance operations of both companies.
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.
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