THE SUDDEN BIG-BUCKS elopement this week by Hewlett-Packard (HP) and Compaq has not been sitting so well with many industry observers or with Wall Street.

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CEOs from both HP and Compaq have spent the week hustling to sell the merger to skeptical investors and stockholders. And yet the news has been received so poorly that UBS Warburg downgraded the stocks of both companies from a "buy" to a "hold."

"We hate doing these valuations, but we are downgrading HP and Compaq to a hold," said UBS Warburg financial analyst Don Young. "We do not like this deal."

Both companies' stock price has taken a hit as well, threatening to dilute the value of the possible merger. HP's stock has plummeted from about $21 per share earlier this week to just more than $17 on Friday. Compaq shares dropped from nearly $13 to settle just above $10 during the same time period.

An HP spokesperson this week stressed, however, that the potential merger would remain valued at $25 billion.

Driving the lukewarm reception to the deal is the concern that the companies have enormous product overlap and face a sticky, if not impossible, integration challenge, according to observers.

"It will take years to meld effectively these services organizations, and I don't know if they have years in which to show results from this," said Richard Buchanan, senior analyst at Metagroup in Stamford, Conn.

Buchanan believes the success or failure of the HP-Compaq merger rests on the shoulders of HP's Chairwoman and CEO Carly Fiorina, who will retain the helm of what she calls "The New HP."

"When you do not have visionary leadership, then it does become a real problem when you integrate companies because what you are really trying to do is mush together very distinct processes and cultures without anything to really drive that," Buchanan said. "But if you have true visionary leadership and some clean statement of strategic intent, then the barriers everyone points to around process and culture tend to be lessened because people are more willing to abandon processes or cultural habits cause they see the value of doing that."

Ultimately, Buchanan thinks the potential HP/Compaq merger is "an admission of weakness more than strengths on the part of both companies." He believes HP and Compaq should not try to become simply a bigger version of themselves, but that only a distinctively new company will have any chance of success.

The task will not be easy. As Young points out, the track record of combining enterprise computing businesses like HP and Compaq has been "terrible." Complicating matters further are the combined company's multiple computer operating systems, VMS, Tru-64 Unix, HP-Unix, and Windows.

"In the key Unix marketplace, Compaq and HP's product lines are not competitive with IBM or Sun Microsystems," said Young. "The complications from these operating systems migrations are compounded by the simultaneous change in microprocessors [to Intel's Itanium], creating the most complicated product road map imaginable."

Many HP customers were equally pessimistic.

"I think putting two big companies like that together doubles the problems, to be honest with you," said Frank Petersmark, the vice president of information systems for Amerisure & Co., in Southfield, Minn. "I think both companies have issues and both are a little late to realize that customers like me had all the hardware we need, frankly."

Petersmark said his company just purchased 800 HP desktops. "I'm glad we bought them now and got them before [HP] had any more problems. I'll be unhappy if [HP] lowers prices quite a bit and I could have gotten them for less as a result of the merger."

Sash Rentala, the vice president in the mergers and acquisitions group for Broadview Associates based in Fort Lee, N.J., thinks the combined wealth of HP and Compaq should get The New HP through any initial tough times. Still, The New HP will only be afforded so much time, said Rentala.

"Do they have enough cash to see them through this tough 1-2 year [transition] period?" Rentala asked. "They have the financial wherewithal, but the biggest thing is the execution risk, especially in the European geographies where it will be troubling in terms of preventing them from laying off people to achieve [needed] cost savings."

Rentala said the potential HP-Compaq merger is having problems because Wall Street "does not see how combining companies who are performing poorly, not only in the PC side but these server side also, can combine and compete any better against an IBM or Dell."

"A lot of Wall Street people think [HP and Compaq] will take their eye off the ball, because they are going to be so busy with the integration issues, and therefore Dell and IBM will have significant advantage in terms of gaining further traction in both the PC and server markets," Rentala said.

Whatever the outcome, HP and Compaq have already hit terminal velocity in pursuing a merger. According to documents filed by HP with the U.S. Securities and Exchange Commission, termination of the agreement to go forward with a merger will cost one of the companies $675 million, depending on the circumstances of the reversal.