Dow Advances 47.74 to 9,997.49; Nasdaq Declines 34.65 to 1,770.78; Hewlett-Packard and Compaq Announce Plans to Merge
ANNOUNCER: From the heart of New York City, here's Lou Dobbs' MONEYLINE. Here now, Lou Dobbs.</s>LOU DOBBS, CNN ANCHOR: Good evening. In tonight's headlines, September begins with the markets decidedly mixed. The Dow gaining 47 points today, but the Nasdaq fell nearly 2 percent. And two Big Board stocks were shut out of today's rally -- Hewlett-Packard and Compaq. H-P announcing it's buying Compaq for $25 billion, and shares of both companies today plummeted. Also tonight, a report suggesting the manufacturing sector may be recovering. Factory activity in August posting the biggest improvement in five years. That manufacturing report helped fuel the Dow higher today, and the announcement from H-P held the index back. The Dow would have been up nearly 80 points were it not for a huge decline in the shares of H-P. Peter Viles has been following the H-P/Compaq deal. Let's check in with him and our other correspondents to see what they're working on tonight. Peter, we begin with you.</s>PETER VILES, CNN CORRESPONDENT: Lou, Carly Fiorina is making a very risky bet and Wall Street today wanted no part of it. Ahead, why this takeover is looking more tonight like a take-under.</s>ALLEN CHERNOFF, CNN CORRESPONDENT: We'll look inside today's purchasing managers report to see why it's indicating the economy may be preparing for a rebound, and how the bulls and bears of Wall Street are reading the situation.</s>SUSAN LISOVICZ, CNN CORRESPONDENT: A back-to-school dilemma for American education: A record number of students and a pervasive shortage of teachers.</s>LOUISE SCHIAVONE, CNN CORRESPONDENT: Mexico's president meets tomorrow with President Bush, with the bitter debate over Mexican trucks high on the agenda.</s>DOBBS: Thanks, Louise. Those stories and a lot more are coming right up. Our top story tonight, Hewlett-Packard's bid to buy Compaq. H-P today stunned the industry by announcing it is buying the struggling PC maker for $25 billion. H-P's embattled CEO Carly Fiorina has been under intense pressure to revive the landmark technology company founded in 1939. Her response: Take one enormous, poorly performing company and combine it with another enormous, worse performing company. Investors didn't seem to appreciate the logic today. Hewlett- Packard's stock suffered its worst session since the 1987 crash. Compaq, the target, actually tumbled on the news. And shares of rival Dell surged. We begin our coverage with Bruce Francis.</s>BRUCE FRANCIS, CNN CORRESPONDENT (voice-over): You'd think you were hearing two teenagers describing a nerdy first date.</s>MICHAEL CAPELLAS, CHAIRMAN AND CEO, COMPAQ: I was listening to this public policy statement, going, are you really interested in this? And you said no.</s>FRANCIS: But that chemistry led to the biggest computer merger in history and massive job cuts -- 15,000 more positions will be eliminated, in addition to a similar amount already announced at the two companies. Hewlett-Packard and Compaq call the deal a merger, but it looks more like an outright acquisition. The Compaq brand will be eliminated, although some product names may survive. Hewlett CEO Carly Fiorina keeps her title. Compaq's Michael Capellas will report to her as president. The two companies promise bottom line benefits in the first year, although they expect revenue to drop less than 5 percent from current projections this year and next. The two companies believe that they can save $2.5 billion a year by the third year. But analysts are skeptical about a deal that produces a correspondent that isn't as nimble as Dell in manufacturing and doesn't have IBM's depth in services.</s>TONI SACCONAGHI, SANFORD C. BERNSTEIN & CO.: It's really a cost- cutting deal, and I'm not really sure that's something the investors really appreciate. The fundamental issue that both companies are really being challenged by Dell at the low end and by IBM and Sun at the high end is really not being addressed.</s>FRANCIS: Fiorina says that she expects an antitrust review of the merger, and that should take six to nine months, but the long shadow of Mario Monti and his defeat of the GE-Honeywell deal in Europe hangs over this acquisition. Fiorina maintains that this combination is different and won't have the same problem. We'll see -- Lou.</s>DOBBS: Good, Bruce. Thanks. Bruce Francis. Good news today from the manufacturing sector, the second encouraging report in as many sessions. While manufacturing did contract for the 13th straight month in August, the situation did improve, and dramatically. And that set off a big rally at the outset today on Wall Street today, the Dow rising more than 200 points at its height, but the rally largely dissipated by the closing bell. Allan Chernoff with the story.</s>CHERNOFF (voice-over): A survey of purchasing managers at more than 400 industrial companies posted its best reading since last November, the National Association of Purchasing Management index. Even more bullish -- the production component of the index showing growth for the first time in 13 months, the new orders component indicating expansion for the first time in 16 months.</s>ART HOGAN, JEFFERIES & COMPANY: Clearly, we have been waiting for good news on the economic front, and particularly in the manufacturing sector of the U.S. economy for quite some time. And for the first time in a while, arguably a year, the manufacturing sector shows some signs of stabilization.</s>CHERNOFF: Economically-dependent so-called "cyclical" stocks led a powerful morning rally. Retailers, forest and paper companies, and especially railroads, which are already seeing improvements in traffic and would benefit from growth in manufacturing. But as an indication of just how fragile confidence is in an economic recovery, the rally faded late in the afternoon, dragged down by technology companies. For the most part, they're still showing few signs of recovery. Semiconductors and networking stocks posted some of the steepest slides.</s>PATRICK BOYLE, CREDIT SUISSE FIRST BOSTON: The only thing that is really holding this market back a little bit is technology stocks, and I think people are still nervous about that Q3 earnings going forward.</s>CHERNOFF: Even with a new signal of hope on the economic front, many traders fear the arrival of earnings warning season. As the third quarter approaches an end, investors expect some companies are preparing to deliver news that a rebound in profits is still nowhere in sight. And it appears technology companies will be announcing more than their share of those warnings -- Lou.</s>DOBBS: And the prewarning period is upon us, so here we go.</s>DOBBS: Thank you. Well, bonds today plunged after the release of that NAPM index. The 10-year fell more 1 point, to yield at 4.95 percent; the 30-year plunging more than 1.5 in price, and the yield there, 5.47 percent. Auto sales continued to decline in August, but both Ford and General Motors topped estimates. The world's largest automaker, General Motors, reported an 8 percent decline in the sales of cars and light trucks. Ford's sales down almost 8 percent in August as well. And even tougher month, however, for DaimlerChrysler's Chrysler Group, total sales there down 24 percent. On the session, shares of GM down fractionally. Ford up almost 40 cents on the day, while DaimlerChrysler dropped nearly 90 cents on the day. Today's session on Wall Street played out much like Friday's: A strong rally that faded, but the Dow did manage to end higher for the second straight session. Christine Romans covering the markets at the New York Exchange, Greg Clarkin at the Nasdaq marketsite, and we begin with Christine.</s>CHRISTINE ROMANS, CNN CORRESPONDENT: Lou, that mega merger and strong manufacturing data enticing the bulls back from vacation, at least early on. Take a look at the Dow today, up more than 200 points in the early going, and really staying near the highs for about two and half hours. But then, they last hour of trade, bulls decided they just got carried away, started taking profits down to about 47 and below 10,000, Hewlett-Packard a consistent looser there. But take a look at the drug stocks, and in particular, Johnson & Johnson, a consistent winner. A study showing its drug-coded stent, that wire mesh tube that goes in arteries, prevented reblockage of arteries. Analysts saying it really secures Johnson & Johnson's lead versus its rival, Johnson & Johnson of about 6 percent. Ely Lilly, Briston-Meyers, Abbott Labs also posting nice gains as the drug group rebounded here today. And merger and activity -- merger -- M&A; activity in the oil patch, Devon agreeing to buy Anderson Exploration. That was the number one gainer on the Big Board. Santa Fe International merging with Global Marine, a $3 billion stock swap deal there. You can see how those oil stocks played here today. Overall, lots of folks encouraged the Dow maintained its green arrow on the end of the day, Lou, but the S&P; 500, that broader gauge, it ended lower.</s>DOBBS: Absolutely. Christine, thank you. Well, the Dow today managed to advance, but that index remains below 10,000, and the Nasdaq is back below 1,800, down for the fifth session of the past six. Greg Clarkin at the Nasdaq marketsite -- Greg.</s>GREG CLARKIN, CNN CORRESPONDENT: And, Lou, you know that black cloud that was hanging over technology shares before Labor Day? Well, it didn't go anywhere over the holiday weekend, it was back in full force today. We saw a number of profit warnings. Sanmina, this is a company that's an electrical component supplier. They supply a lot of networking, a lot of telecom companies. They say their business is incredibly week for the fourth quarter. Ericsson, a big mobile phone company, out with a gloomy forecast. All that took a big toll on the Nasdaq. It was up 30 about mid-day, ended up down 1.9 percent, a loss of 34 points. Here's some of the losers. I mentioned Sanmina, lost better than $2 on the day, Ericsson down almost $1. Intel, they have a quarterly conference call update on Thursday for analysts. Ahead of that, Dan Niles, the analyst for Lehman Brothers, trims his earnings for share estimates. One of the few big name tech winners today: Dell Computer. It finishes with about half of the gains that it saw about mid-day or so on the feeling that it actually may benefit from the get-together of Hewlett-Packard and Compaq. So, that was one of the best performing big-cap technology stocks. Overall, we did see the Nasdaq finishing below 1,800, Lou, for the second time in the last three trading sections.</s>DOBBS: OK, Greg, thanks. Today's announcement of Hewlett-Packard's acquisition of Compaq, a defining moment for Packard CEO Carly Fiorina. It comes at the same time that the computer industry is slumping and H-P and Compaq both have their problems. Peter Viles has the story.</s>VILES (voice-over): Say what you will about Carly Fiorina, you've got to give her credit for taking a chance. When Wall Street sees personal computers as a risky bet, she's doubling down. Part of the challenge now is to convince Wall Street this deal is not just about PCs.</s>SHEBLY SYRAFI, A.G. EDWARDS: At this point, she's going to have a big P.R. campaign to try to go out and convince people to the contrary. She is going to have to convince people that it is not about PCs, that, yes, Hewlett is a PC company and Compaq is also, but really, what they are driving for is to be a total I.T. vendor.</s>VILES: Wall Street wanted no piece of the deal and hammering both stocks, it turned a takeover with a 19 percent premium into a take-under. The value of the offer tonight, $11.94 per Compaq share, a 3 percent discount to Friday's close.</s>SHEBLY SEYRAFI, A.G. EDWARDS: If Compaq stock were to continue to decline, I think there's going to be more pressure from shareholders to kill the deal.</s>VILES: The main concern: Whether management -- that's Fiorina -- can integrate these two huge companies during a brutal downturn.</s>DAN NILES, LEHMAN BROTHERS: If this works, this will go down as one of the most bold moves ever seen in the technology industry. However, with that potential for glory comes the potential for great disaster because this is going to be a very difficult one to do in a difficult environment.</s>VILES: Knowing that Wall Street would worry about integration issues, Fiorina took pains to demonstrate she's on the case, unveiling not just the top two executives, but an eight-person team.</s>CARLY FIORINA, CEO, HEWLETT PACKARD: In fact, I will tell you that we had our first draft integration plan, fairly comprehensive integration plan, on paper and agreed to between Michael and I before we called the bankers.</s>VILES: This is Fiorina's second attempt at a transforming merger. A year ago she made a run at the consulting arm of Price Waterhouse Coopers, a bid valued at $18 billion that fell apart just about the time the entire technology industry hit the wall -- Lou.</s>DOBBS: In this price decline, this discount, as you put it, suggests that we might also see a rival bid here, does it not?</s>VILES: Sure, I think the problem there though, is everybody in this industry is restructuring, so who wants to step up at a time when they are trying to do some house cleaning and keep track of their own costs and get through this period of pull backs and step out on a limb as Hewlett-Packard did today.</s>DOBBS: You have to give Fiorina credit. This is, as you put it a very bold move. Pete, thanks. Earlier I talked with Compaq CEO Michael Capellas and Hewlett- Packard CEO Carly Fiorina and asked them how they expect to fair against their principle competitors, Sun, IBM and Dell.</s>FIORINA: What this combination allows us to do is take costs out. We're going to be aggressive about taking costs out. We are going to be aggressive about leveraging channels, both the direct distribution capability that Compaq has done a particularly good job of building up, as well as a very strong network of channeled partners. In terms of IBM, as Michael suggested, this is now a company that can architect every enterprise. This is a company that will be invited to every dance. But unlike IBM and certainly unlike Sun, this is a company that embraces open standards, open platforms, best of breed partnerships. This is a company that believes in customer choice, customer flexibility, lower cost models based on those industry standards and open platforms. So we are coming after both of those. And in terms of Lexmark and Xerox, this is the company that is going to maintain and build upon the preeminent imaging and franchise in the world and watch this space because you are going to be seeing s more out of us in the coming weeks ahead around commercial printing as an opportunity for example.</s>MICHAEL CAPELLAS, CHAIRMAN & CEO, COMPAQ COMPUTER: I think you also have to look at -- there's another foundation here -- is, as we were thinking this, we were also focusing on the customer. And there is a huge fundamental shift in the way customers are actually buying things. For a couple years with the Internet activity people were saying, I want to buy piece parts, I want to put them together. But increasingly the customer is saying, I want companies who can go across, who can put a solution together and who can add services to that. And both of us had an identical go-to-market model. So it's not just about products and markets, it is also about an approach to customers. And that at the end of the day might be the most important think.</s>DOBBS: Regulatory huddles?</s>FIORINA: Of course. There are antitrust issues. We think this is a very different kind of industry than say, Honeywell and GE participated in. The I.T. industry we are talking about millions of customers. Remember, we have a very large consumer business as well, global, intensely competitive. But clearly it's an important issue. We studied it very carefully. We are going to be working very cooperatively with the EU as well as with U.S. regulatory authorities.</s>DOBBS: In today's market, understandable, your stock, Carly, is off as the acquiring company, but Compaq stock is also down, near a 52-week low, suggesting that some people may be looking for a higher premium, the prospect that that would raise of other bidders?</s>CAPELLAS: I think on this one the deal terms are clear. If we get back to the strategic value and what we've created here, what we've got in a situation right now is there's just a compelling story around this. We have obviously taken certain steps, as you would in any deal of this kind to ensure that it goes forward in a normal manner. And so we are pretty comfortable with that.</s>FIORINA: I guess the only other thing I would add, Lou, is this isn't about a one day stock price. We recognize it is going to take a while for the market to absorb this news. It's a surprise to most people although we have been thinking about it and planning for it for a long time. This is about building a stronger industry leader for the new industry landscape that is evolving.</s>DOBBS: Michael and Carly, thank you. Congratulations to you both. Michael Capellas and Carly Fiorina.