The deal, reported in the New York Times and The Wall Street Journal and later confirmed by HP and Compaq comes after both companies have announced worldwide layoffs and the "new HP" will have annual sales of $US87 billion.
HP's Carly Fiorina will become chairman and chief executive of the combined company while Michael Capellas, Compaq's chairman and chief executive, will become president. The new company will be based in Palo Alto, HP's home town, although it will retain a large presence in Houston where Compaq has been based.
"The new HP will offer the industry's most complete set of IT products and services for both businesses and consumers, with a commitment to serving customers with open systems and architectures," says the official release on the HP website.
"The combined company will have number one worldwide revenue positions in servers, access devices (PCs and hand-helds) and imaging and printing, as well as leading revenue positions in IT services, storage and management software," says the release.
Citing people familiar with the deal, the web editions of the Times and the Journal say that the deal, under which HP will swap about 0.63 of its shares for each share of Compaq, has been agreed by both boards of directors.
According to the Journal, the rationale for the deal is to create a critical mass in their services operations and therefore compete better in that high-margin area against the likes of IBM and Sun.
Cost-cutting is another strong reason for the deal, during a time when the global IT market is under pressure. The two companies expect $2.5 billion in annual cost savings within a few years, the Journal reports.
Both have made efforts in this direction previously. Compaq bought Digital Equipment Corporation in 1998 to boost its services business, while HP toyed with the idea of buying the consulting arm of PricewaterhouseCoopers last year and recently agreed to buy disaster-recovery firm Comdisco.
New York Times: Hewlett-Packard to Acquire Compaq in $25 Billion Deal
Reuters: HP, Compaq Agree to Merge
New Zealand Herald: Hewlett-Packard to buy Compaq in $57bn deal: report
The Australian: HP buys Compaq in $47.5bn deal