EC clears HP acquisition of Compaq

The European Commission Thursday approved the planned acquisition of Compaq Computer Corp. by Hewlett-Packard Co., removing one of many hurdles that stand in the way of the deal. The Commission said that competitive forces in the concerned markets show that the merged entity would "not be in a position to increase prices" and that consumers would continue to benefit from sufficient choice and innovation.

The European competition regulator said that although the deal is the biggest ever tie-up in the information technology sector, it would not push up prices of personal computers, and that consumers "would continue to benefit from sufficient choice and innovation." It attached no conditions to its approval.

The deal has yet to be scrutinized by competition authorities in the U.S., and shareholders of both companies are divided on whether to approve the deal.

"This is an important milestone, particularly given the significance of Europe to us," said Michael Capellas, Compaq chairman and chief executive officer, in a press release. "We will continue to work with regulators around the world in satisfying their requirements."

The two companies are still awaiting approval from the U.S. Federal Trade Commission (FTC), but no date has been set for when this decision will be made, according to a Compaq spokeswoman. Canadian regulators have already approved the merger.

HP shareholders will also need to approve the deal and are expected to vote on the merger in March. Members of the Hewlett and Packard families have opposed the merger and control 18 percent of HP's stock. Several large institutional shareholders in HP, however, have said they will likely vote in favor of the all-stock deal, which was valued at approximately US$25 billion when it was first announced in September 2001.

The Commission's one-month assessment of the deal focussed on its impact on the markets for PCs, computer servers, handheld devices, disk storage and services, it said in a statement late Thursday.

It also looked at the impact of the acquisition on HP's alliance with Intel to develop the family of Itanium 64-bit processors, which began shipping in 2001, and at how the deal might boost HP's ability to bundle printers and PCs into one sales purchase.

It concluded that the combined company would face enough competition from the likes of Dell Computer Corp., IBM Corp., and Fujitsu Siemens Computers BV to prevent it from pushing up prices of PCs.

The regulator found that HP and Compaq together would have a very high market share of small servers, which are computers that connect PCs and other devices on a local area network. However, it decided that the growth in this market is strong enough to sustain one large player without that company being able to "act independently from either customers or competitors."

The new merged company would not be able to foreclose competitors' access to the Itanium processors developed with Intel. "It is in Hewlett-Packard and Intel's interest to guarantee unrestricted access" to the new processors, the Commission said.

Concerns that bundling PCs and printers into one single sale might give HP unfair leverage in the market for printers were unfounded, the European regulator said. "The proposed transaction is not likely to give Hewlett-Packard the ability to foreclose competition in the printer markets," it said.

Carly Fiorina, chairman and chief executive officer at HP, said the company was pleased with the commission's decision, in a statement released shortly after the approval announcement. The decision confirmed HP's belief that the deal will "provide a real stimulus for competition in information technology markets," Fiorina said.

Walter Hewlett, one of the most vocal objectors to the merger and a member of the HP board, continued his fight against the deal, saying in a statement that he believes the company could do better on its own. He claimed a lack of objections to the deal from competitors such as Dell, Sun and IBM helped HP gain approval and demonstrated the risk associated with the merger.

Hewlett and HP have traded barbs debating the deal's merits on numerous occasions.

The Commission added that it has cooperated "closely" with the FTC in its ongoing examination of the deal.

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