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HP's Most Agile Minds Are Key to Agilent IPO


SAN FRANCISCO — The grande dame of Silicon Valley is putting on her finery and going to market--but to sell, not to buy.

Palo Alto-based Hewlett-Packard Co., one of the valley's founding companies, will offer a stake in its test and measurement division to the public as soon as next week.

The stock sale is a giant step for historically slow-moving HP, which is parting with a unit that combines the company's first products with some of its most forward-looking.

The new company, which HP recently dubbed Agilent Technologies Inc., could raise nearly $1.3 billion in the stock sale, though the net proceeds will be paid to HP.

HP also intends to keep 87% of Agilent for now. It will distribute that stake to HP shareholders by the middle of next year.

The 57-million-share offering, expected to be priced at $19 to $22 a share, could give Agilent a total market value of about $10 billion.

It is one of the largest tech IPOs since 1996, when AT&T Corp. sold off a stake in its Lucent Technologies Inc. equipment-manufacturing arm, raising $3 billion.

Lucent shares have risen sevenfold since then, and HP is hoping for a similar payoff by liberating its most sophisticated creators of intellectual property from the bindings of a bureaucratic giant yoked to corporate and consumer demand for printers and computers.

"You've got scientists who crank out 80 patents a year that have just had it with the guys who are trying to get a printer to print red in the middle of a sentence," said an Agilent contractor who asked not to be named. "Agilent has to get out from the HP culture."

While Lucent, close to a pure telecom equipment play, was a home run for AT&T, the story of Agilent--which will trade under the prestige ticker symbol "A" on the New York Stock Exchange--is more complicated.

As outlined in HP's Securities and Exchange Commission filings, as well as in the "road show" for institutional investors in Europe last week and the U.S. this week by deal underwriters Morgan Stanley Dean Witter & Co. and Goldman Sachs & Co., Agilent has an assortment of barely related businesses, along with a cyclical core that can leave it at the mercy of economic downturns.

The units, which date as far back as HP's start in 1939, generated $7.95 billion in revenue last year, up slightly from $7.79 billion in 1997. But earnings plunged by more than half, to $257 million, or 68 cents a share in 1998, from $543 million, or $1.43 in 1997. (Earnings rebounded somewhat to 96 cents a share in the three quarters ended July 31, compared with 81 cents in the year-earlier period.)

Slightly more than half of Agilent's revenue comes from outside the U.S., particularly South Korea and Japan, and the company blamed the Asian economic crisis for the shock to 1998's bottom line.

The good news for investors is that the expected pricing appears reasonable--roughly 25 times the next fiscal year's projected earnings of 80 to 90 cents a share, according to Rose Papp of investment firm L. Roy Papp & Associates, which has $50 million worth of HP shares in three mutual funds.

"At that level, I think we would hold it. That's below the market [price-to-earnings] multiple for decent businesses," Papp said.

Agilent and Hewlett-Packard executives, as well as analysts at most big Wall Street brokerages, declined to comment because of SEC rules prohibiting hyping stocks around the time of their initial sale.

The biggest chunk of Agilent, with $4.1 billion in 1998 revenue and a staff of more than 18,000, manufactures testing and measurement equipment used to design and make electronic and communications devices.

That's where Hewlett-Packard began, with audio oscillators that Walt Disney Co. bought to test the sound equipment for "Fantasia."

Customers now include a veritable who's who of blue chips, including wireless communications leaders Motorola Inc., Ericsson and Nokia Corp., long-distance providers AT&T and Sprint Corp., as well as IBM Corp., Intel Corp., General Motors Corp. and General Electric Co.

Agilent has its fingers in many communications pies, making devices to optimize fiber-optic connections as well as those that aid in sending data over digital subscriber lines. Some of the products sell for more than $1 million apiece.

Less exciting are the parts of Agilent that make chemical analysis systems and medical equipment, such as ultrasound and heart defibrillator parts, investors say.

"The medical instrumentation and chemical analysis are much less attractive," said Bill Milton of Brown Bros. Harriman, who was generally unexcited about the offering as a whole because "Agilent represents the more mature parts of HP's business."

The "hidden jewel" is Agilent's semiconductor-equipment business, which recorded $1.6 billion in sales last year, said Jimmy Chang, a technology stock analyst with U.S. Trust Co. in New York.

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