Updated from 6:33 p.m. EDT

Analysts and investors frowned at the announcement that

H-P's

(HPQ) - Get Report

second-ranking executive, Michael Capellas, is leaving, giving the tech giant yet another challenge.

Cappellas' impending departure, possibly to head up troubled WorldCom, created a minor tizzy in Monday trading. The news triggered a 11% slide in the stock, which was the most heavily traded share on the Big Board.

Capellas, who had been the chief of Compaq, accepted the No. 2 title of president following the company's merger with Hewlett-Packard. His departure means H-P will be losing a hands-on operational chief who still holds loyalty among former Compaq workers, leaving H-P CEO Carly Fiorina to handle ongoing issues of the merger and continuing challenges to the company's core businesses.

Capellas will walk away with a windfall of $14.4 million, equivalent to three times his annual base salary of $1.6 million plus his target annual bonus of $3.2 million, according to the separation agreement outlined in his employment contract. Plus, he'll receive a $1.86 million payout representing a pro-rated annual bonus. Capellas will also be forgiven a $5 million stock purchase loan under the terms of a pre-merger contract, but will pay back with interest a $2.5 million loan he received to cover tax expenses.

Despite the departure, most onlookers say H-P faces plenty of bigger challenges on the strategic front, pointing to weak demand in the core PC market and increasing pressure from archrival

Dell

(DELL) - Get Report

.

Overall, most treated the news as an incremental negative for the stock, though a few critics of Carly Fiorina took the occasions to lob potshots, questioning her ability to run the company on her own.

Shares gave up $1.83, or 11%, to $14.85 in Monday's trading. H-P's stock has slid 27% year to date, though the current price has popped upward by a third from its Oct. 9 low.

"I think it's a mild negative only for really psychological reasons," says Thomas Weisel's Kevin Hunt. His firm hasn't done recent banking for H-P. "I think there are a lot of people who for whatever reason don't like Fiorina. They liked Capellas as an insurance policy. Now that he's not there, those people are not going to be happy and may sell the stock."

"Fiorina's got more than her hands full, and losing a top guy like Capellas is yet another blow," says Paul McEntire, portfolio manager for the

(TPFQX)

Marketocracy Technology Plus fund, which doesn't have a holding in the stock. At Compaq and H-P, Capellas earned a reputation as a "quite brilliant operations manager," he says. "He did a pretty good job of handling the difficult

merger transition."

Others say the resignation creates flight risk among leading managers on the Compaq side. "Capellas had a loyal following within the community of former Compaq managers and staff, and his resignation increases the risk that some of these people may depart too," warns Prudential analyst Kimberly Alexy in a note.

In a comment echoed by some other analysts, she zeroes in on the news that Capellas' position won't be filled, calling it "somewhat negative." "A focused day-to-day operations executive augments CEO Carly Fiorina's stewardship of this $70 billion company," she writes.

Certainly, Capellas' departure leaves the burden of integration entirely on Fiorina's shoulders. She "must turn investor perception her way after a rough start," writes Merrill Lynch technology strategist Steve Milunovich in a note.

"I think Fiorina's a bit over her head personally," says McEntire, ticking off a few of the reasons he doesn't own the stock in his fund. "It's a difficult time to have such a big commitment to the PC market, which has been a victim of tremendous cost declines. PCs are heading more towards being a commodity product."

Related to that worry is a report in

Barron's

last weekend that Wal-Mart, the world's biggest retailer, is preparing to launch its own line of personal computers. The story quoted an analyst who said the company was 12 to 18 months away from contracting its own PC out of Asia, although a company spokeswoman said the retailer had no such plans. H-P is currently Wal-Mart's largest PC supplier.

But the most pressing strategic threat of all, agree McEntire and other investors, is Dell's recently announced

deal with Lexmark to start selling printers, which is bound to strike at the heart of H-P's profit center.

If that weren't enough, Dell is also consuming H-P's share on the PC front. In just the last quarter, Dell unseated H-P to take the No. 1 spot in worldwide PC market share, claiming 15.8% of unit shipments to H-P's 15.7%.

That reversed the lead H-P had held in the second quarter, when it claimed 15.8% market share to Dell's 14.9%.

"Dell's performance over time has been very steady," notes Roger Kay, director of client computing at IDC. "As Dell will gleefully point out, look at the bottom line. Dell is still consistently making money doing what they do."

In contrast, H-P's PC division posted an operating loss of nearly $200 million in its most recent quarter, suffering a sequential drop-off in revenues of 18%. The division isn't expected to return to profitability until the second half of 2003.

Merger Transition: On Track?

Despite the harsh competitive pressures facing H-P, a few analysts sought to extract some comfort from the news of Capellas' departure, saying his exit suggests at least that the merger transition is proceeding to plan.

In a prepared statement, Fiorina sought to play up that angle, saying H-P has "reached a natural transition point. Michael made a commitment to see the merger through, and now thanks to the hard work of the entire team, we are meeting or exceeding all of our integration targets."

Lehman's Dan Niles agreed: "We believe this

departure would only occur if

Capellas felt HPQ was in good shape," adding, "As much as we hate this phrase, we would use this weakness as a buying opportunity." He predicts H-P will offer encouraging sales and earnings guidance when it reports fourth-quarter results next week. (His firm hasn't done recent banking for the company.)

Seconding that notion is Milunovich. "We don't think his resignation portends weak business or other execs leaving. In fact, we believe the integration is going well," he writes. "Although we are disappointed, we maintain our buy rating, figuring H-P is bigger than any one person." (His firm hasn't done recent banking for H-P.)

Like Niles, he predicts H-P will make a decent showing next week. Milunovich expects the company to notch revenues of $17.4 billion, slightly above the Street's estimates of $17.3 billion, and "at least" meet the earnings forecast for 22 cents.