SOURCE:  Parish & Company at www.billparish.com.
Summary of Errors Fixed in Updates
1)  HP CEO Carly Fiorina is on the Board of Cisco Systems. My first report stated this but then after receiving a very hostile email claiming otherwise I changed the reference.  It has since been restated and this can be confirmed here.

Hewlett Packard Compaq Merger Analysis: Impact on IBM, Intel, Cisco Systems, Microsoft, Sun and Walter Hewlett

PORTLAND, Ore.,  Parish & Company, a global leader in analyzing and communicating complex financial transactions, today releases observations regarding the proposed merger between Hewlett Packard and Compaq based upon a detailed review of regulatory filings with the SEC and extensive interviews. Additional detailed are available at www.billparish.com.

Due to the collapse of the Enron corporation, analyst recommendations and accounting issues involving significant mergers are now receiving more scrutiny.

Bill Parish of Parish & Company will be giving a major address regarding these accounting and analyst independence issues at Kent State University on April 26, 2002. An agenda for this conference can be seen at www.billparish.com along with contact information if you would like to have Bill speak at your event. The response has been tremendous from both groups of investment managers and more general interest audiences.

Significant Accounting Issues involving the proposed HP Compaq merger include:

1) HP has proposed an "all stock" merger valued in excess of $20 billion. The risk with all stock mergers is the potential for creating what Parish & Company considers "watered stock" resulting from having too many shares outstanding. Cisco Systems, on whose board previously sat HP CEO Carly Fiorina, has been the biggest user of all stock acquisitions and now has more than 8 billion shares of stock outstanding, including options. Some analysts argue that the higher the percentage of cash used to finance an acquisition, the greater the confidence in its merit. This transaction has no cash component.

2) In February 2002 John McCain and Carl Levin introduced a bill in the US Senate that could significantly impact the merger. This "End the Double Standard on Stock Options Act" would require companies to show option wages as an expense if a tax deduction is taken. Senator McCain notes that the capacity to pay wages in stock and not have this expense charged to earnings was a key ingredient in creating Enron's problems.

HP has had a long history of paying mostly cash wages yet one of its key strategies since 1999 has been to significantly increase the quantity of options granted. Options outstanding at HP have increased 108 percent since early 1999 yet increases at Compaq, Microsoft, IBM and Sun Microsystems were only 4, 1, 22 and 14 percent respectively. If the McCain bill passes, as expected, HP will have been too late to exploit this loophole.

Since HP did not aggressively use options prior to 1999, its past earnings on a comparative basis are understated and those of Compaq correspondingly overstated.  This could also imply that, on an earnings basis with other factors being equal, HP could be more competitive in the future, not just with Compaq but also other leading technology firms including Microsoft and Cisco Systems.

Summary Recommendation:

Based upon this proposed merger being "all stock" in addition to the expected impact from the McCain/Levin bill regarding stock option accounting, Parish & Company recommends that shareholders and related proxy companies voting shares for institutional shareholders vote in favor of both companies staying independent. This conclusion has been communicated to Institutional Shareholder Services, the leading proxy voting firm, in addition to HP's largest institutional investors.

Bill Parish of Parish & Company is an independent Registered Investment Advisor.  His work has been widely quoted in the NY Times, Bloomberg, USA Today and other leading publications.  Many of these reports are available for review at www.billparish.com  Bill is a strong supporter of former SEC Chairman Arthur Levitt's reform agenda announced on September 28, 1998 and he has also been a keynote speaker at various conferences of investment and accounting professionals.  You can contact Bill at bill@billparish.com if you would like to have him speak at your event.