S&P Cuts Credit Ratings for Hewlett-Packard

Analyst Martha Toll-Reed says the downgrade reflects the heightened level of operational and strategic execution risk in the merger betweeen H-P and Compaq

On Mar. 7, Standard & Poor's lowered its corporate credit and senior debt ratings as well as its commercial paper rating on Palo Alto, Calif.-based Hewlett-Packard to reflect a higher level of operational and strategic risk before the completion of H-P's merger with Compaq Computer Corp. Even if the merger with Compaq had not been announced, HP's ratings would have been lowered to a comparable level, S&P says.

"Standard & Poor's recognizes the strategic validity of the merger, the improved market position of the combined company, and HP's strong financial profile for the rating," says analyst Martha Toll-Reed. "However, these positive factors are offset by the heightened level of operational and strategic execution risk inherent in a merger of this size in the highly competitive and rapidly evolving technology market."

HP's weaker profitability levels and diminished earnings predictability reflect the impact of its computer hardware segments, which are currently unprofitable and operate in extremely challenging and competitive environments. While the merger offers the scale and market positions in hardware that could lead to greatly improved profitability, the execution risks are significant, she says.

S&P cut H-P's corporate credit and senior debt ratings to A- from AA-, and lowered its commercial paper rating to A-2 from A-1 plus. The HP ratings also remain on CreditWatch with negative implications due to the still-uncertain outcome of the shareholder vote. If the merger is completed, HP's ratings will be affirmed with a negative outlook, reflecting Standard & Poor's concern about integration and business disruption risks. Compaq's ratings will be reviewed for upgrade reflecting its acquisition by a stronger credit.

If the merger is not completed, Compaq's and HP's ratings will be on CreditWatch with negative implications. Standard & Poor's says it will meet with management of both companies to assess their financial policies and strategies as independent companies, which could potentially entail significant changes from those incorporated in the existing ratings.

Ratings on Compaq Computer Corp. remained on CreditWatch with developing implications, where they were placed Dec. 13, 2001. CreditWatch developing indicates that ratings could be revised upward or downward.

From Standard & Poor's RatingsDirect

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