The end of the Labor Day holiday weekend is a sad event. Another summer gone, a little too quickly.

But there was news: I see that Hewlett-Packard's CEO, Carly Fiorina, has been busy courting Compaq (CPQ-NYSE). While I've been playing Frisbee and having a few brews, she's been scheming to take over the PC market.

I'll admit I was surprised by the announcement. So let's review the economics of the deal and potential synergies of a merger. More important, does it make strategic sense?

We already know that the deal would create the largest PC company in the world. The combined company had 12-month revenue of $87.3 billion. Compaq's 12-month revenue was $40.38 billion, but it's been declining steadily every quarter since peaking in the fourth quarter of 2000 at $11.53 billion. The latest figure was for the second quarter, ending in June, at $8.45 billion. HP (HWP-NYSE) had 12-month revenue of $46.96 billion, peaking at $13.26 billion in its fourth fiscal quarter of 2000, which ended in October, and declining to $10.15 billion in this year's third fiscal quarter, ending in July.

The real question, however, is whether the deal should even be done. While it's easy to second-guess, it's hard for me to understand why you want a bigger market share of the PC business at the expense of the more-profitable imaging business, such as printers and scanners. HP's business mix at the end of its third fiscal quarter was 43% imaging and printing systems, 39% computer systems, and 18% IT services. The Imaging and Printing Systems division generated $4.3 billion in revenue last quarter, with 8.9% operating margins. Meanwhile, the Computing Systems division generated $4.0 billion in revenue, with a margin of-4.5%.

Is this deal in exchange for HP's botched effort to buy PricewaterhouseCoopers' consulting business? Let's hope not, because the quality of Compaq's services business isn't anywhere near the same category. If Carly is trying to get to the IBM solutions model, HP has a long way to go.

Financially, the deal is likely to help margins, primarily through cost-cutting. This is potentially a good thing, as both companies have seen their operating margins steadily decline over the past few years. HP's gross margin in the third fiscal quarter was 25.9%, with hopes that over time it would get back in the historical range of the upper 20s.

Management says it wants to see $2.5 billion in cost savings per year by mid-fiscal 2004, or roughly 61 cents per share; $2 billion in savings will be realized in fiscal 2003. But there may be offsetting losses in revenue from combining product lines and loss of business during the transition.

I fully expect that full integration of these two entities will take years, not months.

Even if we clear all the financial hurdles, there are still formidable operational hurdles. Let's just look at the surface issues. We're talking about a combined company of more than 145,000 people worldwide. Head-count reduction, to the tune of 15,000 or more, will be a clear mandate. I expect that the overlap of operational, sales, marketing, and administrative functions will make for many easy targets in the numbers game. It will take a lot of time before winners and losers are known. Inevitably, the company will struggle until the smoke clears. Meanwhile, customers and business will suffer.

Compaq shareholders will receive 0.6325 shares of HP, roughly a 19% premium to Compaq's prior-day closing price of $12.35 a share. The problem is that HP's share price fell to $19 from $23.21 after the news. This results in a Compaq share price equivalent of $12.02, or a decline of 2.7% from the prior day's close--not exactly a screaming deal for Compaq shareholders and a horrible one for HP shareholders.

At $19 for HP, the combined entity is valued at around $57.2 billion, or about 0.66 times trailing 12-month revenue. Dell, on the other hand, trades at 1.8 times trailing 12-month revenue. Despite the low valuation, outperformance by the new combined entity is suspect, given the outstanding operational and financial issues. I take a pass on this one.

William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.