A combined Compaq and Hewlett-Packard "will have the scope and scale to challenge IBM in the enterprise," HP chairwoman and CEO Carly Fiorina told analysts Tuesday morning on the heels of an announcement that the two companies will join forces in a merger valued at $25 billion. Competing on an even footing with IBM is one of the hopes behind a deal that will create the world's largest provider of IT equipment, PCs, and printing systems.

With PC sales slumping, both HP and Compaq have been looking to bolster their presence in higher-margin businesses such as servers and IT services--both dominated by IBM--but to date have had only limited success. Compaq, which trails both IBM and Sun Microsystems in the server market, saw its market share fall from 18% in the second quarter to less than 14% now, according to International Data Corp. With a 10.5% share, HP was tied for fourth place with Dell Computer. But Fiorina said that teaming up with Compaq could change all that. "We'll have a leading lineup from top to bottom," she told analysts Tuesday. IBM officials declined to comment on the deal.

Under terms of the merger, which received unanimous approval by the boards of both companies, Compaq shareholders will receive 0.63 HP shares for each share of Compaq. The merged entity will operate under the Hewlett-Packard name, while Compaq joins DEC, Apollo, Wang, and several others as once-prominent brands now consigned to oblivion by the fickle computer industry. HP officials expect the deal to close in the first half of next year, though it remains subject to regulatory approval.

HP headquarters will remain in Palo Alto, Calif., though the company says it will retain a significant presence in Compaq's home port of Houston. About 15,000 jobs will be lost as a result of the merger. In total, the companies say they expect the deal to result in annual savings of about $2.5 billion.

Compaq CEO Michael Capellas, who under the deal will become president of HP reporting to Fiorina, said HP will also use its newfound scale to aggressively pursue the lucrative services market. "Services is an absolutely golden opportunity," Capellas says. Earlier this summer, Compaq said it planned to acquire a number of services companies in the coming months. It was not immediately clear how the merger will affect those plans. HP last year flirted with acquiring the management consulting business of PricewaterhouseCoopers.

To help ensure a smooth transition, HP has created an "integration office" led by Webb McKinney, president of HP's business-customer organization, and Compaq CFO Jeff Clarke. Fiorina conceded that integrating the operations of two fiercely competitive computer-industry companies won't be easy. "As difficult as product rationalization is, what's more difficult is integrating a sales force," she said. Compaq and HP have competed for years in just about every conceivable segment of the IT market, from PCs to Unix servers and storage devices.

Some analysts were pessimistic about prospects for a smooth transition. "Compaq employees have been trained to view HP in a hostile fashion; soothing these feelings will not be simple. A major challenge will be retaining key personnel through the massive restructurings that the merger will require," Ashok Kumar, a U.S. Bancorp Piper Jaffray analyst, said in a report issued Tuesday.

HP officials said more details about the proposed merger will be released in a proxy statement the company will file with the Securities and Exchange Commission in the next several weeks.