The merger of Hewlett-Packard and Compaq Computer began with a telephone call some months ago between Ms Carly Fiorina, CEO of Hewlett-Packard, and her counterpart at Compaq, Mr Michael Capellas. The conversation about joint licensing led to merger discussions, Ms Fiorina said.
"It wasn't a Eureka moment, it was a flashing light in both our brains," she said on appearing with Mr Capellas in New York to announce the deal, under which Hewlett acquires Compaq for $25 billion (€27.5 billion) in stock.
The new firm, after it is approved by regulators, will be known only as Hewlett-Packard, with Ms Fiorina as chief executive and Mr Capellas as president. The 63- year-old Silicon Valley firm will survive as a brand, while Compaq, founded in 1982 by three Texas Instruments executives, will not.
Despite a symbolic embrace by the two executives - both dressed in dark power suits - there was no doubt that 46-year-old Ms Fiorina was in charge.
The deal "changed the game" in the high-tech sector, Ms Fiorina claimed. "This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners." The merger made sense at any time but even more in a downturn, she said.
Analysts pointed out, however, that a merger on such a scale would be very complex, and that both companies have long product lines that customers will not want to see phased out. Compaq and Hewlett-Packard are second and fourth in worldwide PC sales - their combined total would surpass leader Dell Computer.
Compaq ranks first in worldwide server sales, while Hewlett-Packard is fourth. Both had been losing share in the computer markets on which they built their success, but the new firm will continue competing at the lower end.
"It doesn't make sense to get out of the PC business, because of the growth potential," said Ms Fiorina. The tech slowdown has also hit the market for related products such as desktop printers, which Hewlett-Packard dominates, and storage, where both companies are big players.
Compaq stock is down 76 per cent from its 1999 high, while Hewlett has fallen 66 per cent in the last year to about half its value two years ago.
Both Hewlett-Packard and Compaq have invested heavily in Intel's new high-power Itanium chips, and the new company, with a combined reduced cost base and annual estimated cost savings of $2 billion by 2003, will now be better equipped to compete with Dell Computer, which has been pursuing a sales war.
The firms also calculate they will be better positioned to move into the area dominated by International Business Machines and Sun Microsystems by focusing on higher margin computer services.
Last year, Hewlett tried to acquire the accountancy firm PricewaterhouseCoopers to expand its services business, but the deal fell through as stock tumbled. IBM, on the other hand, has been making inroads on both companies in sales of large computers running the Unix operating system.
In the last quarter, Hewlett's share of US server shipments fell 25 per cent and Compaq's, 26 per cent. Based on their last 12-month figures, combined revenues from the new company - of $47 billion at Hewlett-Packard and $45 billion at Compaq - will put it on a par with IBM, which reported revenues of $90 billion in the last year.
The merger comes at a time when the computer industry is suffering declining sales due to a saturated market and the slumping worldwide economy. But something else was going on, said Mr Fiorina - the desire of customers for more value and choice.
The merger poses great opportunities but also great risks. Ms Fiorina has portrayed it as a vote of confidence in her leadership.
