Hewlett-Packard (HP) and Compaq announced Tuesday a deal under which HP will acquire Compaq in an all-stock purchase valued at £18 billion. The deal, which has been approved by the boards of both companies, will see Compaq shareholders receive 0.6325 of a new HP share for each Compaq share they hold. After the merger, which is expected to close in the first half of 2002, HP shareholders will account for approximately 64 per cent of the new company's stockholders. After the deal is completed, HP will become one of the largest information technology companies. Based on figures reported for the last four quarters, the combined company would have annual sales of around £62.4 billion and operating income of around £2.8 billion. In contrast IBM reported total sales of around £64.3 billion in the last four reported quarters. Carly Fiorina, chairman and chief executive officer of HP, will retain her position while Michael Capellas, chairman and chief executive officer of Compaq, will be president. Four additional board members from Compaq will join Capellas on the board of HP. In product terms, the companies make a good fit, according to Ian Bertram, regional director of hardware platforms at Gartner's Dataquest Asia-Pacific unit. "At the high end, they don't compete head to head, their competition is IBM and Sun," he said. "In the PC market they fight against Dell and in handhelds against Palm. But there will still have to be a huge rationalization of the product line and the branding." The new HP will have four main divisions: The Access Devices division will be the largest of the four in revenue terms, based on the last four quarters, with estimated sales of £20 billion. It will be led by Duane Zitzner, currently president of the computing systems division of HP. The IT Infrastructure division will include the company's servers, storage and software operations and have estimated revenues of £16 billion. Peter Blackmore, currently executive vice president of sales and services at Compaq, will lead the division. The Imaging and Printing division will be led by Vyomesh Joshi who currently holds the position of president at a similar division at HP. Its estimated revenues will be £14 billion. The smallest, in revenue terms, of the four divisions will be the Services business. Led by Ann Livermore, who is currently president of HP's services division, it will employ almost half of the combined workforce of the company - some 65,000 staff. This division is a key focus for the combined entity, according to Bertram. "The big question is whether they can achieve critical mass (in the services business)," he said. "Compaq has been unable to grow its services business despite buying Digital while HP has been trying to grow organically. Do two struggling services companies equal a good business model?" In a joint statement issued by both companies, Fiorina called the acquisition a "decisive move" and said it will provide "significant cost structure improvements." Those improvements will come as the company cuts product lines, manufacturing and distribution systems made obsolete by the merger. In total, the deal is expected to create savings of £1.4 billion in fiscal 2003 and £1.8 billion by mid-fiscal 2004, the statement said. Staff of both companies, which will number around 145,000 people in 160 countries after the merger, are also likely to be affected as many duplicate positions are merged. Details were not provided in the statement however the companies did say the headquarters of the new company will remain in Palo Alto although a "significant presence" will be retained in Houston where Compaq is currently headquartered. "There is going to be a lot of trepidation among the troops," said Bertram. "All their employees in duplicated positions will be looking over their shoulders, and will effectively have to apply for their jobs again. This will have to be done in a fair and equitable way, which will take a long time." Some manufacturing plants belonging to the two companies are likely to close as well as part of an overall rationalization process which will take between 12 and 18 months, Bertram said. "This will also be devastating for some distributors and resellers, particularly those who deal exclusively in either company's products," Bertram said. The deal comes as the stock prices of both companies are languishing near 12-month lows. Shares in HP closed at $23.21 on Friday, just above the 52-week low of $23.01 and well off its 52-week high of $62.81 while those of Compaq closed at $12.35 and have traded in a range between $33.37 and $12.27 in the last 12 months.