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Tuesday September 4 12:00 AM ET

Hewlett-Packard Buying Compaq

PALO ALTO, Calif. (AP) – Hewlett-Packard is buying fellow computer maker Compaq Computer for an estimated $25 billion, a deal meant to bolster two companies that have been saddled with sagging profits and massive job cuts, the companies announced Monday.

The deal would create a computer behemoth that would rival technology leader IBM. In its most recent 12 months, Hewlett-Packard reported revenues of $47 billion, while Compaq had revenues of $40 billion. The new company’s revenues would be only slightly lesser than IBM’s $90 billion.

Hewlett-Packard Chief Executive Carleton “Carly” Fiorina, 46, who would continue to be chief executive of the combined company, said the deal “vaults us into a leadership role with customers and partners – together we will shape the industry for years to come.”

The new company would have annual earnings of $3.9 billion and operations in more than 160 countries and 145,000 employees.

The reported deal comes as the computer industry suffers through a downturn that has seen sales shrink considerably. Hewlett and Compaq’s stocks suffered drastically in recent months.

The companies have blamed their woes on worsening economic conditions and intensifying price wars in Europe.

Compaq’s stock closed at $12.35 on the New York Stock Exchange (news – web sites) on Friday, down 76 percent from its peak in early 1999. Hewlett-Packard’s stock is worth $23.21, down 66 percent from its high last summer.

Compaq has announced 8,500 job cuts, while Hewlett-Packard is slashing 6,000 jobs.

Compaq and Hewlett-Packard are the PC industry’s second- and third-largest PC makers respectively. Dell ranks No. 1.

The companies said the deal calls for one Compaq share to be exchanged for about 0.63 Hewlett-Packard shares, providing a premium of around 18 percent. H-P shareholders will own approximately 64 percent and Compaq holders 36 percent of the merged company.

The combined company would be based in Hewlett-Packard’s hometown of Palo Alto, Calif. Michael Capellas, Chairman and chief executive officer of Compaq, will be president.

Houston-based Compaq began in 1982 as a maker of personal computers, experiencing rapid growth in the following decade and a half before stumbling recently.

Hewlett-Packard was founded in a garage in 1938 by the late William Hewlett and David Packard. They saw the company grow from a start-up that Hewlett said made “anything to bring in a nickel” to a $49 billion manufacturer of high-quality computers and scientific instruments.