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The Merger of Hewlett-Packard and Compaq (A): Strategy and Valuation

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 UVA-F-1450
v. 2.5

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

No large-scale high-tech merger has ever worked—ever. . . . Melding two large

and fiercely competitive organizations is a formidable challenge in any industry.
The benefits of scale and scope in mature industries, like oil or financial services,
can sometimes outweigh the time and energy squandered in the long integration
process. But in high technology, no company has ever attempted this trade-off
and come out ahead. In fast-moving industries, while the acquirer sorts out its
product portfolio and redraws organizational lines, unencumbered rivals seize
their chance to race ahead.1
—Professor David B. Yoffie
Harvard Business School

Kathryn Macalester, manager of a $5-billion equity fund that owned 16 million shares in
the Hewlett-Packard Company, had recently received the joint proxy and prospectus statement
recommending shareholder approval for the merger of HP and Compaq. In early 2002, most
technology stocks—including HP’s—were trading at less than half their 2000 highs, and there
was little optimism for a strong turnaround before year-end. The fund, which was heavily
invested in technology and growth stocks, took a value approach to investing and, as such, was
more interested in the long-term value proposition of the proposed merger than any short-term
arbitrage opportunities. Accordingly, Macalester had instructed her research associate to provide
background material on the merger, an assessment of the strategic value, and various valuation
analyses to assist Macalester in evaluating the merger. On March 14, 2002, the Thursday before
the Tuesday, March 19, 2002, shareholder vote, Macalester began her review of the materials
provided by her associate.

1
David B. Yoffie and Mary Kwak, “HP and Compaq Should Return to Their Roots,” Wall Street Journal,
December 17, 2001.

This case was prepared by Anna D. Buchanan, under the supervision of Robert F. Bruner. It was written as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright  2004 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation. ◊
 -2- UVA-F-1450

The Proxy

Effective February 4, 2001, Hewlett-Packard Company and Compaq Computer

Corporation filed with the Securities and Exchange Commission a joint proxy statement and
prospectus related to a proposed merger of the two companies. A March 19, 2002, meeting was
scheduled for HP shareholders of record (as of January 28, 2002) to vote on the merger.
Compaq’s shareholders were to convene March 20, 2002, to vote on the merger.

Opposition by the Hewlett and Packard families’ foundations and trusts, who together
owned 18.6 percent of the collective 18.7 percent of HP shares controlled by insiders, had
focused the market’s attention on the much-anticipated vote of HP’s institutional shareholders.
Considering the traditionally poor response rate of individual shareholders and the fact that
institutional shareholders controlled 57 percent of HP voting rights, the contest hinged on the
decisions of these institutional investors.

Background of the Merger

HP’s history2

Famously founded in 1939 by Bill Hewlett and Dave Packard in a Palo Alto, California,
garage and initially capitalized with $538, Hewlett-Packard’s founders remained integrally
connected with the successful growth of the business for decades after its founding (Hewlett
retired as vice chairman in 1987 and Packard retired as chairman in 1993). Hewlett and
Packard’s corporate philosophy and values were known and appreciated throughout the
organization, and “The HP Way,” which came to symbolize innovation, integrity, flexibility,
teamwork, and individual contribution (more fully described in a book of the same name3), did
not materially change throughout the company’s meteoric growth over the next half century.

By the end of 1943, its fifth year in business, the company had revenues of $953,294 and
45 employees, and by 1957, Hewlett-Packard was a public company with $28 million in
revenues and nearly 1,800 employees. As a clear reflection of the company’s views on the value
of its employees, HP began what theretofore was the uncommon practice of granting stock to
employees. Throughout the latter half of the twentieth century, HP grew into a worldwide leader
in computing technology, and by 2000, HP had 85,500 employees and revenues of $48.8 billion,
and was ranked 13th among the Fortune 500.

At the dawning of the new millennium, however, changes were afoot at HP. The
technology sector had undergone substantial transformation during the 1990s, and HP’s
executives were recognizing the need to adapt. Although innovation was still critical to long-
term success, HP’s industry was maturing, and with that came the additional pressure of

2
HP’s Web site, www.hp.com, “HP History and Facts—HP Timeline.”
3
For additional reading, see David Packard, The HP Way: How Bill Hewlett and I Built Our Company, ed.
David Kirby and Karen Lewis (New York: HarperBusiness, 1995).
 -3- UVA-F-1450

slimming margins, the importance of distribution efficiencies, and a more critical need for
developing long-term relationships with customers. Simply being a component manufacturer
was not a viable long-range plan for HP.

In July 1999, HP’s CEO, Lew Platt, retired and named Carleton (Carly) S. Fiorina as
president and CEO. After nearly 20 years at AT&T and Lucent Technologies, Carly Fiorina
became the first company outsider to be named CEO in HP’s 60-year history. Considering that
many existing HP managers had developed under Bill Hewlett and Dave Packard’s tutelage and
reveled in the “Bill and Dave” stories that remained a cherished part of HP lore, Fiorina’s
challenge to lead “HP’s reinvention as a company that makes technology work for businesses
and consumers”4 was no small task. Named chairman of the board of directors on September 22,
2000, Fiorina began the delicate process of transforming HP “into the hottest new company of
the Internet era without losing contact with the old-time commitment to quality and integrity that
made the Hewlett-Packard name so trusted.”5

Events leading up to the merger announcement6

In the midst of an increasingly competitive business environment, throughout 1999 and

2000, Hewlett-Packard’s board of directors and executive management evaluated numerous
alternatives for business growth to secure the company’s future viability. Although HP’s
Imaging and Printing Group (IPG) dominated its market segment, the company did not rank
among the top three competitors in personal computers, servers, storage, or services.
Furthermore, HP’s long-term dominance in imaging and printing was continually being
challenged by Lexmark and Epson, which were selling inexpensive, lower-quality printers in a
bid for market share. Recognizing the need to build strong complementary business lines while
maintaining its strength in imaging and printing, the board of directors evaluated the following
options, paying particular attention to improving the company’s position in enterprise computing
and services:

• “Go-it-alone” strategies for both organic growth and growth through acquisitions in its
current business lines
• A spin-out, sale, or divestiture of its PC business
• A services-focused strategy related to IT outsourcing and systems-integration projects
• Imaging and printing strategies ranging from a spin-out of IPG to expansion into digital
imaging and high-end printing businesses
• “End-to-end” solutions strategy for server, storage, and services businesses achieved
through acquisitions of significant industry participants

4
HP’s Web site, www.hp.com, “HP History and Facts—Timeline: 1990s.”
5
Robert M. Fulmer, Philip A. Gibbs, and Marshall Goldsmith, “The HP Way: Leveraging Strategy with
Diversity, Leadership Development and Decentralization,” Strategy & Leadership (October–December 1999): 22.
6
In addition to other sources noted, this section draws factual information from the joint proxy
statement/prospectus issued by Hewlett-Packard and Compaq on February 4, 2002, pp. 45–54.
 -4- UVA-F-1450

Perhaps influenced by IBM’s very successful turnaround in the mid-1990s, HP’s board
and management settled on a strategy of developing the company’s IT-services business by mid-
2000. IBM’s Global Services Group, which offered tailored “end-to-end” hardware, software,
and business-process solutions to customers, was the success story that emerged from the
outmoded, preturnaround Big Blue. In gaining and retaining technology customers by viewing
them as the business clients they ultimately were, IBM Global Services really had no other single
solutions competitor in the highly fragmented IT-services sector. As described by Louis
Gerstner in his 2002 account of the IBM turnaround, in 1994, IBM saw services as key to
growth:

I believed that the industry’s disaggregation into thousands of niche players

would make IT services a huge growth segment of the industry overall. All of
the industry growth analyses and projections, from our own staffs and from third-
party firms, supported this. For IBM, this clearly suggested that we should grow
our services business, which was a promising part of our portfolio. . . . Services,
it was pretty clear, would be a huge revenue growth engine for IBM.

However, the more we thought about the long-term implication of this trend, an
even more compelling motivation came into view. If customers were going to
look to an integrator to help them envision, design, and build end-to-end
solutions, then the companies playing that role would exert tremendous influence
over the full range of technology decisions—from architecture and applications
to hardware and software choices.

This would be a historic shift in customer buying behavior. For the first time,
services companies, not technology firms, would be the tail wagging the dog.
Suddenly, a decision that seemed rational and straightforward—pursue a growth
opportunity—became a strategic imperative for the entire company.7

In 2000, HP was pursuing a strategy to expand its services business through both organic growth
(fueled by increased investment in its services business) and possible acquisitions. HP
subsequently entered into discussions to acquire the consulting-services business of
PricewaterhouseCoopers LLP (PwC); however, by fall 2000, HP had terminated the negotiations
and continued to evaluate its strategic alternatives. In early 2001, HP retained the services of
McKinsey & Company to assist in its continued effort to implement the new strategy.

Also in 2000, Compaq directors had grown impatient with Compaq’s poor performance,
and were encouraging Compaq’s CEO, Michael Capellas, to explore a potential business
combination with another computer company. Capellas subsequently presented to the board the
relative strengths and weaknesses of potential pairings with such companies as Dell, Sun, EMC,

7
Louis V. Gerstner, Jr., Who Says Elephants Can’t Dance? (New York: HarperBusiness, 2002), 124.
 -5- UVA-F-1450

and Hewlett-Packard, among others. According to Capellas, the strengths of a combined HP and
Compaq were “intuitively obvious. . . . We wanted to be the next IBM.”8

Discussions of a business combination between Hewlett-Packard and Compaq first arose

in June 2001, during conversations between the two companies concerning Compaq’s potential
licensing of HP’s UNIX® (HP-UX) business. Carly Fiorina contacted Michael Capellas to
discuss Compaq’s interest in licensing HP-UX. After a period of deliberation, Capellas
contacted Fiorina to discuss the potential for a broader strategic relationship based on synergies
between the two companies.

Following a June 22, 2001, meeting between Fiorina, Capellas, and members of their
staffs regarding HP-UX licensing, HP initiated an internal analysis of potential business
combinations between the two companies, with the assistance of McKinsey & Company. During
a June 24, 2001, telephonic board meeting, HP’s board of directors authorized Fiorina to further
explore a business combination between the two companies. By June 29, 2001, HP and Compaq
had executed a confidentiality agreement, and the companies commenced mutual business-due-
diligence investigations.

In late July 2001, after a month of additional discussions regarding a combination of the
two companies, HP retained Goldman, Sachs & Co. to act as its financial adviser in connection
with the business combination, and Compaq engaged Salomon Smith Barney as its financial
adviser. By August 5, however, the merger negotiations had stalled, owing, in part, to
disagreement over Capellas’s role in the combined company. Compaq called off the talks, and
the deal remained on hold until late August.9

Between June 24, 2001, and August 31, 2001, HP’s board met eight times and the
Compaq board convened eight times (including an August 30 meeting that Fiorina attended to
present to the Compaq board the proposed benefits of the merger) to consider a combination of
the two companies. By August 30, 2001, a number of issues remained unresolved regarding the
potential merger of HP and Compaq, including, most significantly, the issues of exchange ratio
and management retention.

On September 2 and 3, 2001, HP and Compaq executives, together with their respective
financial and legal advisers, met to negotiate the final terms of the merger agreement. At these
negotiations, mutual agreement was reached on an exchange ratio of 0.6325 share of HP
common stock for each share of Compaq common stock. The companies’ boards of directors
convened separately on September 3 to review the final merger agreement and consider the
fairness opinions of their financial advisers. Both boards unanimously approved and executed
the merger agreement, effective September 4, 2001. On the evening of September 3, 2001, HP
and Compaq issued a joint press release announcing the merger agreement.

8
George Anders, Perfect Enough: Carly Fiorina and the Reinvention of Hewlett-Packard (New York: Penguin
Group, 2003), 117.
9
Peter Burrows, Backfire: Carly Fiorina’s High Stakes Battle for the Soul of Hewlett-Packard (Hoboken, NJ:
John Wiley & Sons, 2003), 184.
 -6- UVA-F-1450

Merger Rationale

Based on the February 4, 2002, proxy, shareholders were to weigh the risks of the merger
against the expected rewards. Described by insiders as a “merger of equals,” HP and Compaq
had different strengths in their lines of business, which together produced a complementary set
of products and services, better able to serve customers at lower cost. The companies attributed
both strategic and financial benefits to the merger.

Strategic benefits

Before the merger discussions, HP and Compaq had focused on growing their enterprise-
computing and IT-services businesses, two areas in which each company had strengths—
Compaq was the more significant player in enterprise systems—but in which neither company
was dominant across the board. By merging, the newly combined companies would be a major
force in enterprise computing and perhaps among the top three in services. Furthermore, with
customers looking to maintain strong relationships with fewer technology vendors, the merger
better positioned the new company to provide its clientele with a wider spectrum of products and
services.

In February 2002, HP’s three primary business lines were (1) Imaging and Printing; (2)
Computing, consisting of desktops, notebooks, servers, and storage products; and (3) IT
Services. Although HP was the market leader in imaging and printing, its computing and IT-
services businesses noticeably lagged the competition, and the company did not have an organic
growth strategy for these businesses. Unlike Compaq, which had moved toward a direct-
distribution model in response to Dell’s cost competitiveness and now shipped a majority of its
PCs directly to customers, HP shipped only 15 percent of its PCs directly to customers.10 To
lower costs, HP had recently announced plans to outsource its PC-manufacturing operations,
although it still acknowledged the need for further cost reductions.

Compaq’s three primary divisions were (1) Access, consisting of commercial and
consumer PCs; (2) Enterprise Computing, which included servers and storage products; and (3)
Global Services. The company was the market leader in PCs and shipped more units
internationally than within the United States. Although direct distribution had helped lower its
costs, Access still operated at a negative margin. By merging with HP’s PC business, Compaq’s
management believed that positive operating margins could once again be achieved through
economies of scale. Compaq was also the market leader in fault-tolerant computing and
industry-standard servers; in the former, HP did not have a presence, and in the latter, HP’s
position was not strong. Conversely, Compaq was not strong in the UNIX market, where HP-
UX was a top supplier. On a revenue basis, Compaq was the world’s leading supplier of storage
systems, and HP was strong in high-end servers.11

10
Joint proxy statement/prospectus issued by Hewlett-Packard and Compaq on February 4, 2002, p. 58.
11
Ibid.
 -7- UVA-F-1450

The new company would be a dominant leader in servers and be well positioned to
exploit the fast-growing trend of “storage area networks” in the storage market. By combining
these complementary server and storage lines, the new company could reduce costs, offer a
comprehensive array of products for enterprise customers, and more effectively allocate R&D
for growth in its enterprise-computing business.

Financial benefits

In addition to strategic benefits, the merger would deliver significant financial benefits to
shareholders. Through major cost savings and improved profitability of business lines,
substantial earning improvements for shareholders would be realized. Management projected
recurring, annual, pretax cost savings of $2.5 billion by mid-2004, as detailed below:12

Expected Annual
Category Pretax Cost Savings
Administrative/IT costs $625 million
Cost-of-goods-sold benefits $600 million
Sales-management benefits $475 million
Research-and-development efficiencies $425 million
Indirect-purchase benefits $250 million
Marketing efficiencies $125 million

Management projected these cost savings to have a value of $5–$9/share, even taking into
account revenue losses of $4.1 billion in 2004 (of total projected 2004 revenue of $92.8 billion),
resulting directly from the merger. Based on management’s estimates, the company’s break-
even overall revenue loss in 2004 would have to be $20.6 billion, or more than five times the
revenue losses projected by management, in order to completely offset the expected $2.5 billion
in annual cost savings.13

After realizing the cost savings from the synergies described above, management
expected a substantial improvement in operating margins beginning in the company’s 2003 fiscal
year, for which it projected an overall operating margin of 8–10 percent. Segment operating
margins were expected to improve as follows:14

HP’s 2001FY Operating

Projected Operating Margin for Comparable
Business Segment Margins for 2003FY Business Segment
Enterprise systems 9.2% −3.2%
Personal systems 3.0% −4.2%
Services 13.7% 4.5%

12
Ibid., 60.
13
Ibid., 60–61.
14
Ibid., 61.
 -8- UVA-F-1450

Market Reaction

At the close of trading on September 4, 2001, the first day of trading after the merger was
announced, HP’s stock price dropped 18.7 percent to close at $18.87, and by September 10,
2001, the last trading day before the World Trade Center attacks, HP’s shares had fallen to
$17.89, for a total postannouncement price drop of 22.9 percent (see Exhibit 1).

On November 6, 2001, Walter B. Hewlett announced his intent to vote against the
proposed business combination of Hewlett-Packard and Compaq. In response, HP shares, which
were still lower than their announcement-day levels, closed up 17.3 percent. The market
certainly seemed to be agreeing with Walter Hewlett (see Exhibit 2).

Walter Hewlett’s Opposition to the Merger

Son of HP cofounder William R. Hewlett and a member of HP’s board of directors,

Walter B. Hewlett had attended five of HP’s eight summer 2001 board meetings, where the
merger was discussed, as well as the September 3, 2001, HP board meeting, where he joined
other board members in voting unanimously for the merger. On November 6, however, Hewlett
said, “After careful deliberation, consultation with my financial advisor and consideration of
developments since the announcement of the merger, I have decided to vote against the
transaction.”15

Citing the market’s strong negative reaction to the announcement, Hewlett expressed
concerns over diluting HP’s high-margin printing and imaging business with Compaq’s low-
margin, fiercely competitive PC business. “With this transaction, we get what we don’t want, we
jeopardize what we already have, and we compromise our ability to get what we need,” said
Hewlett.16

On November 16, 2001, Hewlett filed with the SEC a 71-page report that detailed his
reasons for opposing the merger. In addition to the business-portfolio shift from imaging and
printing to PCs, Hewlett’s filing identified three other areas of concern: (1) the merger would not
solve HP’s strategic problems, as he believed the company would still be poorly positioned to
lead in either enterprise computing or services; (2) the financial impact on shareholders was
unattractive, as substantiated by the dramatic postannouncement decline in HP’s stock price; and
(3) integration risk was substantial, as the two companies were widely believed to have very
different cultures and values.17

15
“Hewlett against Compaq,” CNN/Money, November 6, 2001, http://money.cnn.com/.
16
“A Stunning Reversal for HP’s Marriage Plans,” BusinessWeek online, November 19, 2001,
http://www.businessweek.com/.
17
Friedman Fleischer & Lowe and The Parthenon Group, “Report to the Trustees of the William R. Hewlett
Revocable Trust on the Proposed Merger of Hewlett-Packard and Compaq,” filed with the SEC by Walter B.
Hewlett on November 16, 2001.
 -9- UVA-F-1450

Thus began an active campaign by Walter Hewlett for a negative vote on the merger
proposal. Over the following months leading up to the proxy vote, Hewlett amended his initial
information filing with the SEC numerous times by providing hundreds of pages of
documentation supporting his claim that the merger rationale was flawed. Hewlett succeeded in
creating a very public public-relations battle that sought to sway the opinions of shareholders,
analysts, and industry observers, and as Hewlett managed to keep the HP-Compaq merger
controversy at the forefront of coverage by business-news reporters and Wall Street analysts,
other high-profile dissenters entered the fray.

On December 7, the Packard Foundation, which controlled 10 percent of outstanding HP

shares and was the single largest HP shareholder, decided to oppose the merger. This move
prompted the following comments from Patrick McGurn of Institutional Shareholder Services,
an independent group that analyzed proxies and advised clients on how to vote: “If they lose both
families, I can’t see it going through. . . . It’s a real mess now.”18

HP’s Response to Hewlett’s Opposition

In light of the growing number of “no” votes, as well as Hewlett’s intensified public-
relations efforts to encourage shareholders’ rejection of the merger, HP began its own PR
campaign. On December 19, 2001, HP filed with the SEC a package of slides that it had
prepared for shareholders in order to rebut Hewlett’s criticisms. In summary, HP claimed that
Walter Hewlett had (1) presented a static and narrow view of HP and the industry, (2) selectively
ignored synergies in several key areas of analysis, (3) displayed simplistic antimerger bias by
ignoring empirical evidence of successful mergers, and (4) offered no alternatives.19 See Exhibit
3 for a summary of the pro and con positions on the merger as provided by the Walter B. Hewlett
and HP SEC filings.

Valuation

While much of Walter Hewlett’s basis for opposing the merger was related to strategic
issues, he also claimed that it was just a bad deal financially. Largely discounting the value of
synergies, Hewlett contended that HP was paying too much for Compaq and that shareholder
value would be destroyed by the merger.

Understanding the value of the HP-Compaq merger was no small undertaking for
shareholders at a time when the NASDAQ had suffered a 30 percent drop during the past 12
months of highly volatile trading activity, markets were still skittish as a result of the September

18
“Family Affair: H-P Deal’s Fate Rests with Skeptical Heirs of Company Founders—A No from Packard Bloc
Could Doom Takeover of Struggling Compaq—New Courtship of Investors,” Wall Street Journal, November 9,
2001, A1.
19
“Summary Observations on Walter Hewlett Filings,” section of HP’s presentation slide package HP Position
on Compaq Merger, provided to shareholders and filed with the SEC on December 19, 2001.
 -10- UVA-F-1450

11, 2001, terrorist attacks, and many technology firms were projecting continuing losses for
2002. Arguably, the world was a much different place in early 2002 than it had been on
September 3, 2001, when the deal was announced, and it was certainly fair to question whether a
good deal had been struck. Valuation multiples for comparable companies, as well as recent
comparable transactions, were broadly distributed owing to the uncertain but largely negative
outlook for the tech sector specifically and the economy overall (see Exhibits 4, 5, and 6).

Kathryn Macalester’s associate had summarized the valuation ranges using multiples,
discounted cash flows, and recent market prices for both HP and Compaq (see Exhibits 7 and 8).
Macalester knew, however, that valuation of synergies was critical to the acquisition’s success.
On the one hand, by the 2004 fiscal year, management was predicting annual cost savings of
$2.5 billion (even with annual revenue losses of $4.1 billion) and a substantially positive
earnings increase. On the other hand, Walter Hewlett, an informed HP insider and experienced
technology executive, was contending that management had underestimated revenue losses and
that synergies would not materialize owing to integration debacles. Having a significant impact
on the discounted-cash-flow analysis, correct valuation of synergies could clearly mean the
difference between success and failure. Macalester picked up the proxy report and reviewed the
section on synergies valuation (see Exhibit 9).

The Decision

Given the expected close vote, both the Hewlett-Packard and Walter Hewlett camps had
heavily lobbied institutional shareholders in hopes of swaying their vote. Macalester, whose
fund held approximately 1 percent of the outstanding shares of HP stock, reflected on the
presentations she had attended. Carly Fiorina’s presentation had convinced her of the need for
change at HP and had illuminated the risks of doing nothing. Walter Hewlett’s presentation had
made her wonder about the strategic value of the merger with regard to growing HP’s services
business, and had caused her to question the value of synergies. Both sides had made convincing
arguments for their positions, and both had conducted sophisticated investor-relations
campaigns.

Macalester studied the analysis provided by her associate, including a history of monthly
stock prices (Exhibit 10), capital-markets cost-of-debt data (Exhibits 11 and 12), and the Value
Line tear sheets for both HP and Compaq (Exhibits 13 and 14). Macalester prepared to assess
the strategy and valuation of the proposed merger of HP and Compaq. She jotted down the
following questions as she pored over the materials spread across her desk:

1. What would a SWOT analysis reveal?

2. Was the merger strategy sound?
3. What was the value of synergies?
4. What was the appropriate valuation range for the merger?
 -11- UVA-F-1450

Exhibit 1

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Trading History of Compaq and Hewlett-Packard Stock

(surrounding September 4, 2001, announcement date)

HWP HWP CPQ CPQ Implied Implied

Closing Percentage Closing Percentage CPQ Premium
Date Price Change Price Change Price for CPQ
8/27/2001 25.02 -0.4% 13.27 -2.8% 15.83 19.3%
8/28/2001 24.61 -1.6% 13.32 0.4% 15.57 16.9%
8/29/2001 23.95 -2.7% 13.13 -1.4% 15.15 15.4%
8/30/2001 23.40 -2.3% 12.69 -3.4% 14.80 16.6%
8/31/2001 23.21 -0.8% 12.35 -2.7% 14.68 18.9%
9/4/2001 18.87 -18.7% 11.08 -10.3% 11.94 7.7%
9/5/2001 18.21 -3.5% 10.41 -6.0% 11.52 10.6%
9/6/2001 17.70 -2.8% 10.35 -0.6% 11.20 8.2%
9/7/2001 18.08 2.1% 10.59 2.3% 11.44 8.0%
9/10/2001 17.89 -1.1% 10.35 -2.3% 11.32 9.3%
9/17/2001 16.02 -10.5% 8.75 -15.5% 10.13 15.8%

Source: DataStream.
 -12- UVA-F-1450

Exhibit 2

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Market Prices for HWP, CPQ, Implied CPQ and S&P 500
(8/1/01 - 2/4/02)

30 1,500
12/ 7/ 01 t o 12/ 19/ 01 - HP management
9/ 4/ 01 - M erger announced 11/ 6/ 01 - Walt er Hewlet t 11/ 15/ 01 - HP f iles and board members conduct PR
announces plans t o oppose preliminary proxy campaign in support of merger
25

20 1,000

S&P 500 Index

Price ($/sh)

12/ 27/ 01 - Hewlet t f iles preliminary

11/ 14/ 01 - HP meet s analyst s' proxy opposing merger
15 Q401 expect at ions

10 500
11/ 16/ 01 - Hewlet t f iles init ial report
opposing merger
5

0 0
8/1/2001

8/9/2001

8/17/2001

8/27/2001

9/5/2001

9/19/2001

9/27/2001

10/5/2001

10/15/2001

10/23/2001

10/31/2001

11/8/2001

11/16/2001

11/27/2001

12/5/2001

12/13/2001

12/21/2001

1/2/2002

1/10/2002

1/18/2002

1/29/2002
Date
HWP CPQ Implied CPQ S&P 500
 -13- UVA-F-1450

Exhibit 3
THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):
STRATEGY AND VALUATION
Summary of Opposing Positions as of December 2001

HP Position on Merger1 Walter Hewlett’s Position on Merger2 HP Response to Hewlett’s Opposition3

• Information technology industry continues to
undergo rapid change and HP must continue to
address challenges of new environment
o Status quo has its risks
o Enterprise customers are increasingly looking to:
ƒ Improve return on IT spending
ƒ Migrate to a select few global providers of
integrated end-to-end solutions
ƒ Benefit from the economics and flexibility of
standards-based platforms
ƒ Partner with primary industry innovators to
navigate transitions
o PC industry dynamics are demanding lower cost
structures and increasingly favoring direct
distribution model
o Success in Imaging and Printing requires
continued investment for growth and tighter
linkages with enterprise IT
• Compaq merger is the uniquely compelling
strategic alternative – no other option offers such
comprehensive benefits and opportunities
o Bolsters enterprise position
o Accelerates improvement of Access with
Compaq’s direct capabilities and lower cost
structure
o Delivers key benefits for Imaging and Printing
• Resulting business portfolio is worse than
existing HP portfolio
o Larger PC position will increase risk and cash
drain
o Contrary to professed strategy of migrating to
higher margin, less commodity-like businesses
o Diluted interest in Imaging and Printing
o Lower margins, growth and return on invested
capital
• Acquisition will not solve HP’s strategic
problems
o Market position remains weak in key
attractive sub-segments (high end servers,
high end services)
o PC economics remain unattractive
o No material change in Imaging and Printing
o Combined entity remains “stuck in the
middle” in servers – behind Dell at the low
end and Sun/IBM at the high end
o Services remain heavily weighted to lower
margin support, not outsourcing and
consulting
Summary Observations on Walter Hewlett Filings
• Presents a static and narrow view of HP and the
industry
o Fails to account for rapidly changing industry
dynamics and customer requirements such as a
desire for end-to-end solutions, shift to industry
standard architectures, narrowing number of
strategic vendors
o Paints negative picture of industry-standard
server market while failing to acknowledge the
increasing importance of this market to
customers, its on-going encroachment into the
higher-end UNIX market or the relevance of
Compaq’s direct capabilities
o Dismisses combined storage position based on
its current size while ignoring high growth
rates, strong margins and server pull-through
dynamics, as well as Compaq’s leadership in
the emerging and attractive SAN category
o Illustrates the challenges facing HP Enterprise
business while incorrectly implying that the
business can be sustained or improved without
substantial strategic change
o Acknowledges the challenges facing the PC
industry but ignores the need to achieve
economies of scale and obtain a more effective
distribution capability to meet the challenges of
a maturing industry
o Assumes that Imaging and Printing results can
continue to support other businesses while
meeting its own competitive challenges and
reinvesting for growth

1
“Executive Summary,” section of HP’s presentation slide package HP Position on Compaq Merger, provided to shareholders and filed with the SEC on December 19, 2001.
2
Friedman Fleischer & Lowe and The Parthenon Group, “Report to the Trustees of the William R. Hewlett Revocable Trust on the Proposed Merger of Hewlett-Packard and Compaq,” filed with the SEC by Walter Hewlett
on November 16, 2001.
3
“Summary Observations on Walter Hewlett Filings,” section of HP’s presentation slide package HP Position on Compaq Merger, provided to shareholders and filed with the SEC on December 19, 2001.

HP Position on Merger1
• Combination addresses industry dynamics and
customer requirements, creates stronger company
and is financially compelling
o Significantly improved profitability and operating
margins in Enterprise, Access and services
o Highly complementary R&D capabilities
o Broad improvement in projected financials
o Substantial accretion to HP earnings of 13% in
first full year (FY03)
o Synergies (net of revenue loss impact are worth
$5 - $19 per HP share)
o Value created by combination outweighs premium
paid
• Management is experienced and focused on
execution, and integration planning is ahead of
schedule
o Integration planning is sharply focused on value
creation
o Leadership has deep experience with complex
organizational changes
-14-
Walter Hewlett’s Position on Merger2
• Financial impact on shareholders is unattractive
o Market reaction is very negative
o Relative contribution of earnings favors
Compaq
o HP dilution vs. Compaq accretion
o Increased equity risk and cost of capital
• Integration risk is substantial
o No precedent for success in big technology
transactions
o Most acquisitions fail, particularly when
market reaction is negative
o Integration difficulties are obvious
o Revenue risks offset cost synergies
o Very difficult to mesh cultures
UVA-F-1450
HP Response to Hewlett’s Opposition3
• Selectively ignores synergies in several critical
analyses (Here, HP critiques individual charts in
Hewlett’s report and points to incorrect
assumptions.)
• Exaggerates the impact of potential revenue losses
o Walter Hewlett Filing assumes each dollar of
revenue loss results in $0.25 of profit loss
o The 25% contribution margin is grossly
exaggerated because revenue losses are likely to
occur in businesses that carry substantially
lower contribution margin (e.g. PCs and
industry-standard servers)
o The 25% contribution margin assumption
significantly distorts accretion / dilution
analysis
• Displays simplistic anti-merger bias, ignoring
empirical evidence of successful mergers
o Walter Hewlett filings fail to view transaction
in the context of industry conditions
o Consolidation has been a vehicle for superior
value creation in maturing industries
o Acquirers in recent largest M&A transactions
have outperformed peers who face similar
industry dynamics. (Here, HP provides a
chart comparing average acquirer price
performance relative to applicable S&P
Industry Index and the S&P 500, without citing
specific examples.)
o Initial market reaction has not been a good
predictor of success. There are several
examples of successful technology mergers that
had initial negative market reactions
(Veritas/Seagate Software; BEA Systems/Web
Logic; Nortel/Bay Networks; Veritas/Open
Vision)
• Offers no alternatives
 -15- UVA-F-1450

Exhibit 4

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Financial Information on Peers

(data presented at 2001 year-end)

Sales Gross 1-yr Est. 2002

3-yr Profit EBIT Market Total EPS
Company Name SIC Sales CAGR Margin Margin Value Return Growth * P/E Beta D/E ROA ROE ROI
(in $000) (%) (%) (%) (in $000) (%) (%) (%) (%) (%)
Apple Computer Inc 3571 5,363 -3.4 24.9 -6.2 5,441 -39.8 nm nm 1.31 0.08 -0.6 -0.9 -0.9
Cisco Systems Inc 3576 22,293 38.1 55.0 0.1 140,671 -70.6 -46.0 nm 1.82 0.00 -2.9 -3.7 -3.7
Compaq Computer Corp 3571 33,554 2.5 25.3 1.4 16,592 -34.6 -94.0 nm 1.49 0.05 -2.4 -5.1 -4.8
Dell Inc 3571 31,168 19.5 18.4 7.3 71,666 5.2 -23.0 57.3 2.21 0.11 9.2 26.5 23.9
Fujitsu Ltd (ADR) 7373 37,646 -4.6 34.2 -1.5 15,183 -42.2 nm nm 1.12 1.33 -8.3 -44.8 -17.4
Gateway Inc 3571 5,938 -7.4 21.1 -3.5 2,605 -55.3 nm nm 2.04 0.00 -33.9 -74.1 -57.5
Hewlett-Packard Co 3570 45,226 -1.3 28.6 4.5 32,651 -63.3 4.0 52.6 1.48 0.27 1.9 4.5 3.5
Hitachi Ltd (ADR) 3570 60,104 -3.0 29.3 -1.5 24,550 -15.4 nm nm 1.15 0.78 -4.9 -21.0 -9.9
Intl Business Machines Co 7371 85,866 1.7 41.9 10.8 208,371 43.0 -2.0 25.8 1.24 0.68 8.7 32.7 19.5
NEC Corp (ADR) 3571 38,354 -1.7 27.6 -1.3 13,830 -46.8 nm nm 1.69 2.83 -6.2 -54.8 -13.5
Silicon Graphics Inc 3571 1,854 -15.7 41.0 -16.7 272 -62.9 nm nm 0.98 nm -38.5 nm -186.9
Sun Microsystems Inc 3571 18,250 23.1 51.9 10.1 51,197 -65.4 nm 52.4 1.82 0.14 5.4 9.3 8.1
Unisys Corp 7373 6,018 -5.8 30.0 4.5 4,002 -14.3 -54.0 nm 1.20 0.35 -0.9 -2.4 -1.7

Averages 30,126 3.2 33.0 0.6 45,156 -35.6 -35.8 47.0 1.50 0.55 -5.6 -11.2 -18.6

* First Call Consensus at FYE 2001

Legend for SIC Codes

3570 - Computer & Office Equipment
3571 - Electronic Computers
3576 - Computer Communication Equipment
7371 - Computer Programming Services
7373 - Computer Integrated System Design Services

nm = "not meaningful"

Sources: O'Neil Database; Bloomberg; and Research Insight.

 -16- UVA-F-1450

Exhibit 5

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION
Information on Recent Computer-Related Transactions
(completed transactions; acquisition of 100% interest)
Deal Multiples Premium over Stock Price (%)
Equity
Equity Value / Equity
Value Equity Target Value /
Ann Target Acquirer Trans Equity / Net Value / Cash Net 1 day 1 wk 4 wks Defensive Consideration
Date Target Name SIC Acquirer Name SIC Value Value* Sales EBIT Flow Inc prior prior prior Tactics Offered
($ mil) ($ mil)

01/26/98 Digital Equipment Corp 3571 Compaq Computer Corp 3571 $9,124 $9,063 0.69 34.67 15.45 32.99 na na na None Cash, Stock
08/03/98 Stratus Computer Inc 3571 Ascend Comm. Inc 3661 $970 $835 1.20 9.97 5.08 10.90 19.1 53.3 33.4 None Stock
11/11/98 Sulcus Hospitality 3571 Eltrax Systems Inc 7373 $71 $71 1.22 nm 26.16 nm 159.6 149.6 260.5 None Stock
05/11/99 Meridian Data 3571 Quantum Corp 3572 $94 $93 5.08 nm nm nm 168.9 189.6 213.8 None Stock
05/24/99 Texas Micro Inc 7373 RadiSys Corp 3577 $120 $120 1.44 37.63 24.68 34.38 68.7 66.6 75.5 Lockup Stock
06/22/99 Diamond Multimedia Systems Inc 3571 S3 Inc 3674 $183 $183 0.32 nm nm nm -13.9 21.6 4.5 None Stock
07/12/99 Sequent Computer Systems Inc 3571 IBM Corp 7371 $809 $811 1.02 nm 166.50 nm 3.3 6.7 52.4 None Cash
07/27/99 Mylex Corp 3571 IBM Corp 7371 $261 $258 1.77 nm nm nm 20.0 17.8 108.7 None Cash
08/09/99 Data General Corp 3571 EMC Corp 3572 $1,410 $1,409 0.97 186.20 13.68 74.80 72.8 63.5 31.1 Lockup Stock
09/20/99 Nichols Research Corp 8711 Computer Sciences Corp 7373 $401 $396 0.87 18.51 13.93 30.18 6.9 9.0 24.6 None Stock
07/26/00 Telxon Corp 3571 Symbol Technologies Inc 3577 $571 $571 1.57 nm nm 2.21 27.9 40.0 32.1 None Stock
02/21/01 Blue Wave Systems Inc 3571 Motorola Inc 3663 $120 $119 3.24 33.19 25.42 30.63 -2.2 -4.2 -12.4 Lockup Stock
04/02/01 General Semiconductor Inc 3674 Vishay Intertechnology Inc 3676 $890 $660 1.37 8.74 6.21 20.25 43.0 40.6 40.9 None Stock
07/16/01 SCI Systems Inc 3571 Sanmina Corp 7373 $6,336 $4,812 0.55 20.88 11.18 48.17 19.6 27.8 44.5 None Stock, Liabs
09/04/01 Compaq Computer Corp 3571 Hewlett-Packard Co 3571 $25,263 $25,175 0.62 13.51 7.66 nm 18.9 10.2 -2.0 None Stock
12/07/01 IKOS Systems Inc 7373 Mentor Graphics Corp 7373 $115 $116 1.91 nm nm nm 36.7 46.7 111.5 None Cash

Averages $2,921 $2,793 1.49 40.36 28.72 31.61 43.3 49.3 67.9
Averages w/o DG/EMC $3,022 $2,886 1.52 22.14 30.23 26.21 41.2 48.2 70.6

* Equity Value Based on Financials. This value is calculated by multiplying the actual number of shares outstanding from the target's most recent balance sheet by the offer price per share plus the cost to acquire convertible securities.

Number of Participants in Computer-related Deals by SIC Code

3571 Computer and Office Equipment Electronic Computers 14
3572 Computer and Office Equipment Computer Storage Devices 2
3577 Computer and Office Equipment Computer Peripheral Equipment 2
3661 Communications Equipment Telephone & Telegraph Apparatus 1
3663 Communications Equipment Radio & TV Broadcasting Equipment 1
3674 Electronic & Electrical Equipment Semiconductors and Related Devices 2
3676 Electronic & Electrical Equipment Electronic Resistors 1
7371 Business Services Computer Programming Services 2
7373 Business Services Computer Integrated Systems Design 6
8711 Business Services Engineering Services 1
32
na = "not available"
nm = "not meaningful"
Source: Securities Data Corporation.
 -17- UVA-F-1450
Exhibit 6
THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):
STRATEGY AND VALUATION
Information on Recent “Jumbo” Deals (Transaction Value > $25 Billion)
(completed transactions; acquisitions of 100% interest)
Deal Multiples Premium over Stock Price
Equity
Equity Value /
Equity Value Equity Target Equity
Target Acquirer Trans Value Value* / Net Value / Cash Value / 1 day 1 wk 4 wks Defensive
Ann Date Target Name SIC Acquirer Name SIC ($mil) ($mil) Sales EBIT Flow Net Inc prior prior prior Tactics Consideration Offered

10/01/97 MCI Communications Corp 4813 WorldCom Inc 4813 $41,907 $37,407 2.45 33.46 13.17 68.26 102.99 100.9 94.29 None Stock, Liabs
04/06/98 Citicorp 6021 Travelers Group Inc 6311 $72,558 $72,185 2.03 12.40 10.91 19.72 7.9 10.4 19.0 None Stock
04/13/98 BankAmerica Corp 6021 NationsBank Corp,Charlotte,NC 6021 $61,633 $61,415 2.54 11.38 9.80 18.81 0 -0.3 2.8 None Stock
04/13/98 First Chicago NBD Corp 6021 BANC ONE Corp,Columbus,Ohio 6021 $29,616 $29,421 2.86 12.96 np 19.26 26.5 38.0 34.1 Lockup Stock
05/07/98 Chrysler Corp 3711 Daimler-Benz AG 3711 $40,466 $40,467 0.65 7.26 4.89 14.31 48.8 54.3 45.7 None Newly Issued Ord Sh
05/11/98 Ameritech Corp 4813 SBC Communications Inc 4813 $62,593 $62,554 3.84 16.50 9.83 27.78 np np np None Stock
06/24/98 Tele-Communications Inc 4841 AT&T Corp 4813 $53,592 $60,192 7.90 196.07 30.55 Nm np np np None Stock, Other
07/28/98 GTE Corp 4813 Bell Atlantic Corp 4813 $53,415 $53,451 2.19 10.95 6.11 23.52 -2.7 -2.7 -4.9 Lockup Stock
08/11/98 Amoco Corp 1311 British Petroleum Co PLC 6719 $48,174 $47,902 1.40 14.57 8.16 22.84 np np np Lockup Newly Issued Ord Sh
12/01/98 Mobil Corp 1311 Exxon Corp 1311 $78,946 $78,907 1.25 4.82 np 27.31 26.3 34.7 32.2 Lockup Stock
01/18/99 AirTouch Communications Inc 4813 Vodafone Group PLC 4812 $60,287 $60,212 12.90 65.45 34.77 89.74 40.6 50.2 71.5 None Cash, Ord Sh
04/01/99 ARCO 2911 BP Amoco PLC 2911 $27,224 $27,224 2.52 nm 107.61 nm 27.2 29.9 54.4 None Newly Issued Ord Sh
04/22/99 MediaOne Group Inc 4841 AT&T Corp 4813 $49,279 $44,768 15.53 nm 47.48 31.31 12.1 13.0 22.8 None Cash, Stock, Liabs
06/14/99 US WEST Inc 4899 Qwest Commun Intl Inc 4813 $56,307 $46,298 3.69 15.30 8.74 31.47 32.5 50.1 49.8 None Stock, Liabs
09/07/99 CBS Corp 4833 Viacom Inc 4841 $39,434 $39,434 5.78 62.50 31.88 579.92 -0.1 4.0 8.5 None Stock Type B
11/04/99 Warner-Lambert Co 2834 Pfizer Inc 2834 $89,168 $99,710 7.71 38.61 33.86 57.53 25.3 29.7 40.8 None Stock
12/20/99 Pharmacia & Upjohn Inc 2834 Monsanto Co 2879 $26,486 $26,521 3.70 31.02 np 37.30 -1.1 -5.5 -13.5 Lockup Stock
01/10/00 Time Warner 7812 America Online Inc 7375 $164,746 $164,800 6.03 27.31 15.18 84.08 70.9 55.8 70.2 None Stock
05/02/00 Bestfoods 2034 Unilever PLC 2021 $25,065 $20,895 2.41 15.44 12.95 28.51 42.3 35.7 53.3 None Cash
07/10/00 SDL Inc 3674 JDS Uniphase Corp 3674 $41,144 $35,172 188.09 1056.21 781.60 1395.71 77.2 68.6 106.3 None Stock
07/24/00 VoiceStream Wireless Corp 4812 Deutsche Telekom AG 4813 $29,404 $29,104 12.14 nm nm nm -25.4 -20.3 -20.2 None Cash, Ord Sh, Liabs
09/06/00 Associates First Capital Corp 6141 Citigroup Inc 6021 $30,957 $30,938 2.36 4.85 4.78 20.57 50.8 52.8 45.6 None Stock
09/13/00 JP Morgan & Co Inc 6211 Chase Manhattan Corp,NY 6021 $33,555 $33,716 1.72 10.48 7.45 15.90 14.7 21.5 32.4 Lockup Stock
10/16/00 Texaco Inc 2911 Chevron Corp 1311 $42,872 $35,993 0.78 10.25 6.92 15.55 17.7 22.6 17.5 None Stock
09/04/01 Compaq Computer Corp 3571 Hewlett-Packard Co 3571 $25,263 $25,175 0.62 13.51 7.66 nm 18.9 10.2 -2.0 None Stock

Averages – Total Sample $51,364 $50,555 11.72 75.97 56.87 125.21 27.88 29.71 34.57
Averages – without JDS/SDL $51,790 $51,195 4.38 25.63 17.19 51.40 22.34 24.37 27.26

* Equity Value Based on Financials. This value is calculated by multiplying the actual number of shares outstanding from the target’s most recent balance sheet by the offer price per share plus the cost to acquire convertible securities.

SIC Number of Participants in “Jumbo” Deals by Business Type

1311 Oil and Gas; Petroleum Refining Business Services 1
2021 Food and Kindred Products Chemicals and Allied Products 1
2834 Drugs Commercial Banks, Bank Holding Companies 7
2879 Chemicals and Allied Products Computer and Office Equipment 2
2911 Oil and Gas; Petroleum Refining Credit Institutions 1
3571 Computer and Office Equipment Drugs 3
3674 Electronic and Electrical Equipment Electronic and Electrical Equipment 2
3711 Transportation Equipment Food and Kindred Products 2
4812 Telecommunications Holding Companies, Except Banks 1
4841 Radio and Television Broadcasting Stations Insurance 1
4899 Telecommunications Investment & Commodity Firms, Dealers, Exchanges 1
6021 Commercial Banks, Bank Holding Companies Motion Picture Production and Distribution 1
6141 Credit Institutions Oil and Gas; Petroleum Refining 7
6211 Investment & Commodity Firms, Dealers, Exchanges Radio and Television Broadcasting Stations 4
6311 Insurance Telecommunications 14
6719 Holding Companies, Except Banks Transportation Equipment 2
7375 Business Services 50
7812 Motion Picture Production and Distribution

nm = “not meaningful”
np = “not provided”

Source: Securities Data Corporation.

 -18- UVA-F-1450

Exhibit 7

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Compaq Triangulation Diagram

Valuation Method High Low Difference

Net Sales Multiple (0.5× to 1.5×) $50.3 $16.8 $33.5
DCF (Stand-alone) $20.8 $15.9 $4.9
Cash Flow Multiple (6× to 26×) $31.8 $7.3 $24.5
Latest Mkt. Price ($12.00 to $12.40/sh) $21.1 $20.4 $0.7
LTM Mkt. Price ($12 to $20/sh) $34.1 $20.4 $13.6

Valuations of Compaq

Net Sales Mult

DCF

Implied Equity Value at 2/4/02

 -19- UVA-F-1450

Exhibit 8

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Hewlett-Packard Triangulation Diagram

Valuation Method High Low Difference

Net Sales Multiple (0.5× to 1.5×) $67.5 $22.5 $45.0
DCF (Stand-alone) $42.5 $34.1 $8.4
EBIT Multiple (9× to 40×) $46.7 $10.5 $36.2
Cash Flow Multiple (6× to 26×) $46.2 $10.7 $35.5
Latest Mkt. Price ($22 to $23/sh) $44.6 $42.7 $1.9
LTM Mkt. Price ($22 to $31/sh) $60.1 $42.7 $17.5

Valuations of Hewlett-Packard

Net Sales
Mult

EBIT
Mult

DCF
 -20- UVA-F-1450

Exhibit 9

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Valuing Synergies

The following description of HP’s synergies valuation is excerpted from pages 60 and 61 of the joint proxy
statement/prospectus dated February 4, 2002.

“[The] cost savings have a net present value of approximately $5-9 per share of the combined company calculated
by applying a range of price/earnings multiples to the estimated earnings per share impact of the cost savings in
calendar year 2004 and discounting those amounts to the present. This analysis is based on the following
assumptions:

• $2.5 billion of pretax cost savings in calendar year 2004;

• a range of price/earnings multiples of 15x-25x which is supported by the average one-year forward
price/earnings multiple for HP in the last year (20.8x) and the last three years (22.2x);
• a discount rate of 15% which is based on the weighted cost of equity of the combined company on a pro
forma basis;
• an assumed effective tax rate of 26% for the combined company, which is based upon the weighted average
of the effective tax rates of each HP and Compaq;
• marginal pretax profit decline of approximately $500 million in calendar year 2004 resulting from
estimated overall revenue loss for the combined company resulting from the merger in calendar year 2004
of approximately $4.1 billion (representing 4.5% of overall estimated revenue for calendar year 2004 of
$92.8 billion or 4.9% of estimated revenue for the fiscal year 2003), which is based upon potential revenue
loss in businesses of the combined company as follows: 18% in home PCs; 11% in UNIX® servers; 8% in
business PCs; 7% in appliances; 6% in NT servers; and 5% in storage. We have assumed that our
combined imaging and printing business will not experience material revenue losses as result of the merger
because Compaq does not have an imaging and printing business. In addition, we have assumed that our
combined service business will not experience material net revenue losses as a result of the merger;
• a weighted average contribution margin of 12%, which represents the marginal pretax profit decline
resulting from revenue loss. We have assumed a weighted average contribution margin of 12%, reflecting
an assumed contribution margin of 11% for the combined company’s Personal Systems business (which is
expected to account for 66% of 2004 revenue loss) and 14% for the combined company’s Enterprise
business (which is expected to account for 34% of 2004 revenue losses); and
• our estimate of the net present value of the cost savings resulting from the merger excludes both the cost
savings expected to result from the merger in calendar years 2002 and 2003 and the expected non-recurring
cash costs of achieving those cost savings (e.g. costs of integration) during those calendar years, as well as
the pretax profit decline resulting from estimated revenue loss in calendar years 2002 and 2003. Our
estimate of the net present value of the cost savings resulting from the merger does not account for possible
revenue increases resulting from the merger.

Based upon the revenue loss assumption described above, and a weighted average contribution margin of 12%, the
combined company would have to lose approximately $20.6 billion of overall revenue in calendar year 2004 as a
result of the merger (i.e. more than five time the amount of our assumed revenue loss resulting from the merger) in
order to completely offset our anticipated annual cost savings of $2.5 billion resulting from the merger.”
 -21- UVA-F-1450

Exhibit 10

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Monthly Stock Prices

Ratio of CPQ
CPQ HWP to HWP
Price Beta Price Beta Price

Sep-98 31.63 na 26.47 na 1.19

Oct-98 31.63 na 30.13 na 1.05
Nov-98 32.50 1.07 31.28 1.34 1.04
Dec-98 42.00 1.15 34.16 1.35 1.23
Jan-99 47.63 1.15 39.19 1.36 1.22
Feb-99 35.38 1.36 33.22 1.47 1.06
Mar-99 31.69 1.35 33.91 1.45 0.93
Apr-99 22.31 1.29 39.44 1.47 0.57
May-99 23.69 1.25 47.16 1.35 0.50
Jun-99 23.69 1.15 50.25 1.34 0.47
Jul-99 24.06 1.13 52.34 1.30 0.46
Aug-99 23.16 1.12 52.69 1.28 0.44
Sep-99 22.88 1.06 45.38 1.33 0.50
Oct-99 19.13 0.95 37.09 1.21 0.52
Nov-99 24.44 0.95 47.44 1.23 0.52
Dec-99 27.06 0.97 56.88 1.28 0.48
Jan-00 27.25 0.94 54.13 1.28 0.50
Feb-00 25.13 0.98 67.25 1.16 0.37
Mar-00 27.00 0.96 66.44 1.06 0.41
Apr-00 29.19 0.91 67.50 1.04 0.43
May-00 26.25 0.95 60.09 1.08 0.44
Jun-00 25.56 0.94 62.44 1.08 0.41
Jul-00 28.06 0.90 54.59 1.11 0.51
Aug-00 34.06 0.94 60.38 1.13 0.56
Sep-00 27.58 1.04 48.50 1.21 0.57
Oct-00 30.41 1.05 46.50 1.24 0.65
Nov-00 21.50 1.25 31.63 1.44 0.68
Dec-00 15.05 1.28 31.56 1.44 0.48
Jan-01 23.71 1.37 36.85 1.46 0.64
Feb-01 20.20 1.40 28.85 1.53 0.70
Mar-01 18.20 1.40 31.27 1.43 0.58
Apr-01 17.50 1.33 28.43 1.34 0.62
May-01 15.99 1.33 29.32 1.34 0.55
Jun-01 15.32 1.34 28.60 1.33 0.54
Jul-01 14.94 1.40 24.66 1.33 0.61
Aug-01 12.35 1.45 23.21 1.32 0.53
Sep-01 8.31 1.55 16.05 1.41 0.52
Oct-01 8.75 1.54 16.83 1.43 0.52
Nov-01 10.15 1.55 21.99 1.47 0.46
Dec-01 9.76 1.55 20.54 1.46 0.48
Jan-02 12.35 1.48 22.11 1.46 0.56

High 47.63 1.55 67.50 1.53 1.23

Average 23.60 1.20 39.92 1.32 0.62
Low 8.31 0.90 16.05 1.04 0.37

Volatility 18.3% 15.4%

Proposed Exchange Ratio 0.6325

na = “not available”

Source: Standard & Poor’s Research Insight 7.9, a division of the McGraw-Hill Companies.
 -22- UVA-F-1450

Exhibit 11

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Yield Curve for U.S. Government Bonds

Source: Bloomberg.
 -23- UVA-F-1450

Exhibit 12

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION

Basis-Point Spreads: U.S. Industrials to U.S. Governments

(as of March 14, 2002)

Bond Rating
Term AAA AA A BBB
3 Mo 40.00 46.00 91.00 134.00
6 Mo 37.00 43.00 82.00 132.00
1 Yr 43.00 60.00 113.00 157.00
5 Yr 48.00 60.00 103.00 164.00
10 Yr 67.00 82.00 125.00 185.00
20 Yr 17.00 55.00 90.00 144.00
30 Yr 74.00 93.00 119.00 174.00

Source: Bloomberg.
 -24- UVA-F-1450

Exhibit 13

THE MERGER OF HEWLETT-PACKARD AND COMPAQ (A):

STRATEGY AND VALUATION
 -25- UVA-F-1450

Exhibit 14

THE MERGER OF HEWLETT PACKARD AND COMPAQ (A):

VALUATION AND STRATEGY

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