Carleton Fiorina is set to become the new company's chief executive

In the market for computer servers, Compaq ranks first while HP is fourth after Dell and IBM.

Even so, the new giant will have a lower market value than each of the two merger partners had last summer when their share prices peaked.

Since then, the value of their stock has dwindled as falling sales and market worries have forced them to lay off several thousand workers and slash their profit forecasts.

Cuts

HP chief executive Carly Fiorina said the firms would not be laying out their full plans for the merger immediately.

But costs would be cut by $2.5bn over the next three years, the company said.

Sales last 12 months:

Hewlett-Packard: $47bn Compaq: $40bn IBM: $90bn Dell: $32bn

Both companies have cut several thousand jobs in recent months - 8,500 at Compaq and 6,000 at HP - and analysts predict savage cutbacks going forward too.

"They've got to cut out half the new company," said Gartner industry analyst Martin Reynolds.

"This has got to be an epitome of cost cutting. They can't afford the luxury of being nice".

Leader

The merger would create a "global technology leader", the companies said in a joint statement.

PC sales and market share, January - March 2001:

Dell: 4,160,000, 12.8% Compaq: 3,943,000, 12.1% Hewlett-Packard: 2,381,000, 7.3% IBM: 2,000, 6.2%

"It's a logical move in the consolidation of the PC industry," said Bear Stearns analyst Andrew Neff.

"At a particularly challenging time for the IT industry, this combination vaults us into a leadership role with customers and partners," said Ms Fiorina.

"Together we will shape the industry for years to come," said Ms Fiorina, who will remain chairman and chief executive.

Both companies' boards have approved the proposed stock swap.

Compaq chairman and chief executive Michael Capellas will become HP president.

Falling sales

If the merger is approved by shareholders and regulators, the new combined company would have annual earnings of $3.9bn, 145,000 employees and operations in more than 160 countries, Ms Fiorina added.

New HP's four divisions and their annual revenue:

PCs and handheld devices $29bn IT infrastructure, including servers and data storage $23bn Printing $20bn Consulting $15bn

Hewlett-Packard and Compaq, which reported annual revenues of $47bn and $40bn respectively, have both seen sales decline drastically in the current industry downturn.

Falling sales have slashed the companies' market values.

Hewlett-Packard's stock, worth $23.21 before trading started on Tuesday, has fallen 66% from its high last summer.

Compaq has fared even worse, down 76% at $12.35 from its peak in early 1999.