S&P sees risks in HP-Compaq deal

Standard & Poor's cut Hewlett-Packard's long-term debt rating three notches and short-term debt rating two notches because of risks arising from the computer and printer maker's proposed merger with Compaq Computer.

Palo Alto, Calif.-based HP on Wednesday won Federal Trade Commission approval for the nearly $22 billion all-stock merger with Houston-based Compaq, a day after the Institutional Shareholder Services advisory firm endorsed the link-up. A HP shareholder vote is scheduled for March 19.

S&P cut HP's senior unsecured debt three notches to "A-minus," its fourth-lowest investment grade, from "AA-minus," and its short-term debt rating to "A-2" from "A-1-plus." It warned of the possibility of further downgrades, which ordinarily raise borrowing costs.

"While the merger offers the scale and market positions in hardware that could lead to greatly improved profitability, the execution risks are significant," S&P analyst Martha Toll-Reed said in a statement.

HP said in a statement that it was disappointed with S&P's decision, adding that it was irrespective of the company's merger with Compaq, noting S&P cited concerns about the computer hardware business and management disruption if the merger doesn't happen. HP also noted that it had cash and short-term investments of $7.1 billion as of January.

Moody's Investors Service rates HP's long- and short-term debt "A2" and "P-1," each one notch above S&P's new ratings.