The Hewlett-Packard

1. Martin Reynolds Paul McGuckin The Hewlett-Packard/Compaq Merger: Picking the Winners and Losers

2. Critical Questions Why did they do it? Will the deal complete? Can HPQ improve profitability? Will service suffer? Can technology win?

3. Why Did They Do It? Scope, breadth, and scale No. 1 player in many segments But broad overlaps in products and geographies Synergy in high-volume servers Cost-cutting opportunities in PCs Critical mass in services But redeployment needed Software: leverage breadth and scale Seen as admission of weakness Question of trust: investor; employee; customers The deal has not been well-accepted. It is up to HPQ to prove doubters wrong. One advantage is that the greatest turmoil � now to one quarter post-merger � will take place while the market is still down. However, IT growth is expected to return in the second half of 2002, and the company must sharpen its key messages and strategies immediately on completion to take advantage of that growth opportunity.The deal has not been well-accepted. It is up to HPQ to prove doubters wrong. One advantage is that the greatest turmoil � now to one quarter post-merger � will take place while the market is still down. However, IT growth is expected to return in the second half of 2002, and the company must sharpen its key messages and strategies immediately on completion to take advantage of that growth opportunity.

4. Will the Deal Go Through? Board, Management � full support Stock price: not a factor Stockholders � doubters have sold Regulators � issues are manageable U.S. retail share 70 percent European markets Corporate raiders � possible risk Great risk to both businesses if deal collapses

5. Can HPQ Improve Profitability? Printers $20B #1 Strong Access $30B #1 Under siege Infrastructure $20B #1/2 Flat (IANT OK) Services $20B #3 HW driven Servers and services are the strategic areas But massive overlap Revenues flat to down Gentle retreat from unprofitable deals Aggressive cost reductions required

6. Will Service Suffer? Brands both promise support and transition Will place service above profit (0.8 probability) Risk to non-open platforms in the long term HP/UX; Itanium; WinXP clear survivors History of outstanding migrations Vax to Alpha 68000 to PA-RISC Itanium migrations as good as or better

7. HPQ Product Directions Printers: no change, all HP PCs: Either one but not both Handhelds: Jornada, iPaq synergistic: iPaq brand Servers: HP/UX with Tru64 add-ons NSK; Tru64; OpenVMS; MPE all support only Strong transition tools IANT a strong point Dell a threat Services: full merge

8. Printers: The Cash Cow Bottom Line Underwrites profit for HPQ HP printers displace Compaq-labeled printers, at Lexmark�s expense Printers and supplies decline from 41% of HP�s current revenue to 22% after merger Despite Indigo acquisition, concerns about the willingness of merged company to invest sufficiently in high-speed color printing

9. Personal Computers A weakening market Margins shrinking; yet strong growth HPQ is No. 1 in many segments Critical challenge: Dell Compaq tends to market share over profitability. HP tends to limit market share to maintain profitability, but occasionally sacrifices profits to gain share � hence it has a cyclical pattern in the long term. Overall, the market is down with all vendors contracting, but Dell has been gaining share. Together, HPQ is a strong No. 1. However, the declining market, customer uncertainty (however unjustified), and the requirement for profitability will force the combined entity to yield share to Dell. Dell is the biggest threat to companies positioning themselves as leading with market-unifying open standards. Its business model permits it to undercut all traditional competitors. Dell started in PCs, absorbed notebooks, and is now attacking servers and infrastructure. Dell is the greatest threat to HPQ. It will not go away. Summary HPQ must increase PC dollar profitability; neither company has succeeded in doing this through operational management, so it will likely yield some market share. PC architecture is relatively standard, so HPQ may choose either HP or Compaq platforms - but not both. This is not an issue. We expect current systems to run through their natural life cycle (0.9 probability). Strategy: Any vendor of PCs will do. Tactic: Use uncertainty and promises of future economies of scale as a negotiating tool.Compaq tends to market share over profitability. HP tends to limit market share to maintain profitability, but occasionally sacrifices profits to gain share � hence it has a cyclical pattern in the long term. Overall, the market is down with all vendors contracting, but Dell has been gaining share. Together, HPQ is a strong No. 1. However, the declining market, customer uncertainty (however unjustified), and the requirement for profitability will force the combined entity to yield share to Dell. Dell is the biggest threat to companies positioning themselves as leading with market-unifying open standards. Its business model permits it to undercut all traditional competitors. Dell started in PCs, absorbed notebooks, and is now attacking servers and infrastructure. Dell is the greatest threat to HPQ. It will not go away. Summary HPQ must increase PC dollar profitability; neither company has succeeded in doing this through operational management, so it will likely yield some market share. PC architecture is relatively standard, so HPQ may choose either HP or Compaq platforms - but not both. This is not an issue. We expect current systems to run through their natural life cycle (0.9 probability). Strategy: Any vendor of PCs will do. Tactic: Use uncertainty and promises of future economies of scale as a negotiating tool.

10. Mobility Mobile market better than desktop PCs A fickle market Execution over technology Handhelds: $10B market ahead Synergistic product lines End-to-end solutions

11. The Server Story Server market $50B, 6% CAGR Opportunities in open standards Windows $15B, 9% CAGR Intel $21B, 13% CAGR

12. Bottom Line HP/UX on Itanium prevails TruClusters grafted on top of HP/UX Tru64 declines rapidly in ISV enthusiasm and revenue Even the combination of HP/UX and Tru64 can�t keep IBM from gaining the No. 2 Unix server market position by YE2002 Unix Servers: Winners and Losers

13. Intel Servers: Heart of the merger Bottom Line Proliant prevails over NetServer due to superior brand equity and distribution channels Struggle over next-generation Itanium platform could lead to 6 - 12 month market delay Operating system gridlock and closer Microsoft alignment result in more passive stance toward Linux

14. Proprietary Servers: Niche market or accelerated end-of-life? Bottom Line OpenVMS: Likely decision to focus R&D resources on migration tools (to Windows or HP/UX) rather than on porting OpenVMS to Itanium Himalaya: Ported to Itanium circa 2004, but remains a niche market MPE/ix: Not ported to Itanium; migration tools to Windows or HP/UX

15. Storage: Too many products Bottom Line Compaq�s StorageWorks brand and products prevail in the midrange HP�s high-end XP storage arrays relatively safe (but could be challenged by new high-end Compaq technology) Potential synergy between competing Storage Area Management technologies, but many overlaps

16. Services: Can 1 + 1 = 3? Bottom Line Similar business models and revenues Platform-centric focus Some synergy in expertise: Compaq excels in mission-critical Windows NT HP excels in data center Unix But no leap into business consulting (as would have happened with the PwC acquisition)

17. Software: New, Bigger Strategy Needed Bottom Line .NET endorsement by 2003, with Netaction redirected to a supporting role OpenView brand sustained, but increasing competition from software powerhouses Software continues to be a minor component of merged company

18. HP/Compaq Merged Vendor Rating

19. Recommendations Competitors � Share available Customers � Sharpen negotiations Investors � Companies are cheap Suppliers � Resist discounts