Compaq, Hewlett-Packard Merger Battle Heats Up
Nov 13, 2001 (Houston Chronicle - Knight Ridder/Tribune Business News via
COMTEX) -- The fight brewing between Hewlett-Packard Co. and its shareholders
over the merger with Compaq Computer Corp. could come to blows before week's
end.
HP said Monday it hired a proxy-solicitation firm, New York-based Innisfree M&A,
to help promote the merger deal as the time for a shareholder vote nears. The
move is seen as a response to efforts by Walter Hewlett, an HP board member and
son of an HP co-founder, who last week announced his opposition to the deal.
Hewlett also hired his own firm to sway others away from the merger.
The two firms could be used as part of a public relations duel to convince large
shareholders to vote their way on the $19 billion deal.
That could include mailings with details on the merger sent to shareholders,
intense lobbying efforts and other means of spreading views on the vote.
HP and Compaq may file a joint proxy statement outlining the details of the
merger with the Securities and Exchange Commission in the next few days.
But the first test in the battle for the hearts and minds of investors could
come as early as Thursday afternoon. The David and Lucile Packard Foundation,
the philanthropic organization of the other HP founder, said it has hired an
adviser to review the deal. The foundation is expected to decide how it will
vote its 10.3 percent of outstanding company shares it holds after HP reports
its earnings this Thursday.
HP and Compaq executives have been meeting with financial and technology
analysts almost nonstop since the merger was announced in early September. At
first the deal found few supporters, but in recent weeks, as the company spread
its message and the outlook for the economy worsened, more analysts began to
give the merger a better review.
For example, Lehman Bros. analyst Dan Niles said in a recent report that
although the deal created some uncertainty among customers, the economic
downturn was the best time to attempt the merger.
"The current macro environment means most new information technology projects
are on hold as companies are very discriminating in regards to large
expenditures in a down economy," Niles said.
Lehman Bros. analysts who track the chances of success for such deals said the
market was giving the merger a 65 percent chance of closing, but they gave it an
85 to 95 percent chance.
The companies even seemed to be moving the deal forward more quickly than
anticipated. The merger has been slated to close by the end of the second
quarter of 2002, but Compaq Chief Executive Officer Michael Capellas recently
said he was hoping for the deal to close by the end of March.
Hewlett's announcement last week, however, cast new doubts about the deal's
success. Hewlett had voted in favor of the merger previously but changed his
mind, saying he and several of his siblings with about 5 percent of the
company's outstanding shares would try to stop the deal.
His anti-merger arguments weren't much different from those heard earlier --
that it would expose HP too broadly to the unprofitable desktop PC business and
take management's attention away from business fundamentals. His family name,
however, has the potential to sway other investors, said U.S. Bancorp Piper
Jaffray analyst Ashok Kumar.
"The Hewlett and Packard families will have a disproportionate impact on the
outcome by fueling institutional shareholder defections," Kumar said.
The families account for about 20 percent of all outstanding shares, while
institutional investors account for about 50 percent. If all of the family
shares go against the merger, only about 30 percent of the institutional
shareholders would be needed to kill the merger, he said.
Because of the deal's structure, however, HP shareholders won't vote on the
merger itself.
The deal is a reverse triangular merger, which means Compaq will merge with a
newly created HP subsidiary. HP owns all the shares of that new subsidiary, so
only HP's board of directors needs to approve that transaction.
Where HP shareholders do have a say is when it comes to issuing new HP shares to
Compaq investors, which is a necessary component of the deal. Under New York
Stock Exchange rules, a majority of the votes cast -- not a majority of the
votes outstanding -- must be in favor in order for it to go through. In this
case, a nonvote is not considered a no vote.
A shareholder vote is several months away and must await U.S. and European
regulators' approval of the merger.
Most observers say approval from the U.S. agency reviewing the case, the Federal
Trade Commission, is likely. The position of European officials is not as widely
known, but they are also likely to approve the deal with some concessions.
In a related development Monday, General Motors Corp. chose Compaq as its
supplier of computers and services for three years.
Terms weren't disclosed, but GM told Bloomberg News its technology systems
support 400,000 employees and production in 50 countries.
By Tom Fowler
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