agreed late Monday to buy
for $25 billion in stock, betting it can reverse its fortunes by dominating the fading personal computer industry.
The deal would create the world's largest PC maker, combining the No. 2 and No. 3 players and catapulting them ahead of
. The deal is also supposed to vault H-P and Compaq into the computer services business, where the acknowledged leader is
But while a deal may make the companies more formidable on paper, some observers wonder whether the combination can solve the companies' own significant problems. Both have seen profit margins plunge as the PC has become a commodity business; industry leader Dell has been not only the biggest but also the most profitable PC maker, owing to its direct sales model and its ability to offer customers the features they want.
H-P and Compaq have seen their shares plunge in the past year as a sharp slowdown in information technology spending stalled growth in their core PC businesses. The deal's scant premium for Compaq shareholders suggests to some observers that business is so bad that the Houston PC pioneer was eager to sell.
The deal also marks another turn in the closely watched two-year tenure of H-P boss Carly Fiorina. She joined the PC giant from
in the summer of 1999 amid much fanfare, but has overseen little but turmoil. Like many tech companies, H-P has cut back its workforce this year and repeatedly slashed earnings and revenue guidance.
Backers of the deal say it will pair the visionary Fiorina with Compaq's Michael Capellas, a strong operational leader, giving the combined company the strongest management either has had in years. Still, the size of the combination will make integrating the companies a gargantuan chore of its own.