Compaq Expects To Post 4Q Profit; Doubts About HP Merger RemainCompaq Expects To Post 4Q Profit; Doubts About HP Merger Remain

Compaq Monday said its fourth-quarter 2001 earnings will be better than anticipated, and it now expects to record a profit for the period on revenue in excess of $8 billion. Earlier, the company had predicted that fourth-quarter revenue would come in at between $7.6 and $7.8 billion, leading to a per-share loss of 3 cents. Compaq is expected to formally announce fourth-quarter and year-end results on Jan. 16. A year ago, Compaq posted fourth-quarter revenue of $11.5 billion and a profit of 30 cents per share.

Observers say a combination of cost cutting and better-than-expected demand helped boost Compaq's fortunes in the fourth quarter. Lehman Brothers analyst Dan Niles says demand from both commercial and consumer customers was better than expected, as were sales to the European market. He also says Compaq's move to a lower-cost, Internet-based sales model is paying dividends. As a result, "Compaq should be more competitive with Dell," Niles says.

The news seems to indicate that Compaq can operate as a profitable entity even if its proposed merger with Hewlett-Packard is scuttled by shareholder or regulatory opposition. Many observers feel the odds are stacked against the deal. "The general investor consensus is that the merger will not occur due to the opposition of Hewlett and Packard families," Niles says in a report issued Monday.

Concerned that the merger would drag HP deeper into the low-margin PC business, the David and Lucile Packard Foundation in December said it would oppose the transaction in a shareholder vote slated for early this year. The foundation owns 10.4% of HP's stock. HP board member Walter Hewlett and several other HP founding family members, who together own 8% of HP's stock, have said they too would vote to quash the deal. About one-third of the 82% of shareholders who have yet to express an opinion are retail shareholders who typically don't vote. That means HP executives, led by CEO Carly Fiorina, must now convince 80% of the remaining institutional shareholders that the deal is good for the company and its stock price.

Many analysts believe it will be a tough sell. Says US Bancorp Piper Jaffray analyst Ashok Kumar, "We don't believe the merger is likely to get shareholder approval."