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Hewlett-Packard Co. CEO Carly Fiorina can breathe a little easier. The European Commission approved HP’s $23.5 billion acquisition of Compaq Computer Corp. on Thursday without requiring divestitures or other conditions. The executive body and competition watchdog of the European Union, which last year barred General Electric Co.’s $46 billion acquisition of Honeywell International Inc., said HP-Compaq would not thwart competition in the markets for personal computers and servers. With the EU’s approval, investors, equity analysts and company insiders revived optimism about the deal’s prospects. The merger has been in doubt since its announcement in early September, and support for the deal eroded during a proxy battle launched in December by HP board member Walter Hewlett. The son of HP co-founder William Hewlett has helped marshal the 18 percent share held by the founders’ families in opposition to the transaction. EU clearance is expected to have little impact on the proxy fight, and several observers Thursday still gave the deal only 50-50 odds of closing. Although the Commission’s approval was expected, it brought the acquisition one important step closer to completion. “In the psychological sense, a regulator has now looked at some very different elements of this transaction and said, ‘This doesn’t bother us,’” said Richard Chu, an analyst with SG Cowen Securities Inc. “This has taken one distraction away, so the view that the approval adds to the deal’s momentum is true.” The news also bolstered a growing sentiment among Compaq insiders that the deal’s chances are rising. A Compaq executive, who in December argued that opposition from HP’s cofounding families likely would sink the deal, said Thursday that he had “gotten much more optimistic in the last couple weeks.” A combination of positive analyst reports on the benefits of a merged HP-Compaq, recently announced support from institutional shareholders such as Alliance Capital Management Holding and the European regulatory approval are all adding up, he added. “I’m starting to see a lot more optimism here now that positive momentum is building up,” said the executive, who spoke on condition of anonymity. Stockholders of the companies are expected to vote on the deal in March, but no date has been set. Adding to the impetus is Compaq’s improving financial performance. CEO Michael Capellas said earlier this week the company posted stronger-than-expected fourth-quarter results and upped the company’s forecasts for 2002. “Compaq is getting stronger, which shows that this deal was not a desperation move,” said Brett Miller, an analyst with AG Edwards & Sons Inc. “I think Compaq would actually come out stronger than HP if the deal fell through, but once you put the two together, you get a strong enterprise business, a profitable PC group versus two unprofitable ones, and a strong imaging business.” Fiorina, who acknowledges her job hangs in the balance with the success or failure of the Compaq acquisition, in a statement Thursday described the EU approval as “an encouraging step in the continuing process of satisfying regulators worldwide that this deal will provide a real stimulus for competition in information technology markets.” Capellas said it was an “important milestone, particularly given the significance of Europe to us.” But winning over shareholders still presents a major challenge for HP and Compaq. HP needs about 61 percent of its shareholders to back the deal to overcome opposition from the Hewlett and Packard families. And Walter Hewlett has steadily intensified his criticism of the deal. The dissident board member Thursday argued that quick EU approval shows the merger is bad for investors. “We understand that HP’s rivals raised almost no objections to the proposed merger,” he said in a statement. “We are not surprised; we believe Dell, Sun and IBM must be delighted at the prospect of a merger that would so greatly distract and damage two of their rivals.” Other institutional investors said they expected European approval for the deal. “This is good either way,” said David Katz, chief investment officer at New York-based Matrix Asset Advisors. Although he opposes the merger, Katz said a swift EU decision removes some uncertainty about the companies’ future. In a statement Thursday, the EC said the tie-up neither heightens HP’s ability to raise prices nor makes it dominant in the region. Regulators assessed the merger’s impact on markets for personal computers, servers, handheld devices, storage software and services. Concerning PCs, the Commission found that the merged company would face strong competition in Europe from several “credible rivals,” including IBM, Dell and Fujitsu-Siemens Computers. The U.S. Federal Trade Commission could approve the deal by the end of February. “The FTC confirms the European Commission’s statement concerning our close cooperation in the investigation of this matter, that it remains under investigation by the FTC, and that the EC’s decision does not prejudice in any way the outcome of the assessment in the U.S.,” the FTC said in a statement. Antitrust lawyers following the merger said the FTC staff has decided the deal does not harm retail competition because consumers will switch to online or catalog purchases if prices rise at bricks-and-mortar PC stores. The staff also decided the deal would not harm competition for servers, another area of potential concern. “The problems did not pan out,” one antitrust lawyer said. But one source cautioned that the five FTC commissioners have yet to sign off on the transaction, which means the deal could still encounter obstacles. – With additional reporting by Charles Sisk, Renee Cordes and Jaret Seiberg Copyright (c)2002 TDD, LLC. All rights reserved.

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