December 11, 2001
Compaq Continues to Back H-P Deal
But Is Beginning to Rethink Its Future
By GARY MCWILLIAMS, MOLLY WILLIAMS and PUI-WING TAM
Staff Reporters of THE WALL STREET JOURNAL
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With its proposed sale to Hewlett-Packard Co. in jeopardy, Compaq Computer Corp. is beginning to look at the possibility of an alternative future as a stand-alone firm with a renewed focus on big corporate customers, the company's chief executive said in a memo distributed to employees.
In the memo sent by e-mail during the past weekend, Compaq Chief Executive Michael D. Capellas said he still supports H-P's $25.02 billion purchase of the big Houston computer maker, but conceded "our responsibility is to maintain a pragmatic view of our business and a clear focus on the future.
"Whether we are part of the new H-P or a stand-alone company," Compaq would continue to build its sales around packages of hardware, software and services, he said. The memo followed a decision Friday by the David and Lucile Packard Foundation to vote against the Compaq/H-P combination, a move that has raised many new questions about the companies' ability to complete the deal. The children of William Hewlett and David Packard and their foundations control 18% of the company's shares. With the families' no votes, analysts said a steep 67% of H-P's institutional shareholders would have to vote in favor for the deal to proceed.
Meanwhile, a key Compaq director Monday said if there is a decision to terminate, it could come within the month. "In another few weeks, everyone will have a better idea how this will shake out," said Thomas J. Perkins, a venture capitalist who sits on Compaq's board. While insisting "no one is panicked," he said neither company wants a protracted struggle. "If it drags on for months and months and months, it's not good for both companies," he said.
Investors are signaling that the transaction won't happen. Compaq's shares Monday dropped 14%, or $1.62, to $9.70 as of 4 p.m. in New York Stock Exchange composite trading. Hewlett-Packard shares, by contrast, fell just 52 cents on a day when markets were down, changing hands at $23 at 4 p.m. That values the Compaq offer at $14.55 a share, a 50% premium to Compaq's current price.
The foundation's unexpected rejection threw both companies into turmoil. Compaq's board met twice during the weekend and Mr. Perkins reiterated Monday that he expects Compaq to seek a face-to-face meeting with H-P directors in the near future.
A person close to Compaq's board said Compaq could ask for a preliminary tally of H-P shareholders favoring the merger. If H-P cannot show sufficient votes for approval, Compaq could insist on a parting of ways.
"They'll go to H-P and say, 'We're not going to wait until March. We've got to get on with our business,' " this person said. The companies have said they expect a shareholder vote by March. Compaq directors have a regularly scheduled meeting Thursday in Houston.
If either company unilaterally withdraws from the deal, the other party could insist on a $675 million breakup fee.
The board of the Houston computer maker is concerned that its interests are no longer in sync with those of H-P Chief Executive Carly S. Fiorina, who has staked her reputation on seeing the deal through. Mr. Perkins said he believes Compaq now finds itself "caught in the crossfire" between Ms. Fiorina and the founders' families.
Even customers are finding the back and forth unsettling. Allen Schmoock, chief information officer at Albertson College in Caldwell, Idaho, which exclusively uses H-P printers and servers, says the recent H-P/Compaq deal news has raised worries about possible service disruptions. "Our first concern was what would this do to the ongoing service?" he said. "And our other concern, to a lesser degree, was which products will survive?" Mr. Schmoock says he attended an education technology conference in October and approached H-P resellers and H-P's booth to get some clarity on the questions, but "no one knew anything," he says.
Monday, Compaq and H-P officials continued to insist they fully support the deal. Both remain committed to the transaction, and people close to the H-P board say the company isn't considering alternatives. H-P now will aggressively challenge the founding families over the no votes, people close to the company said. Where they had previously avoided direct challenges to the families, it now plans to "let out all the stops," these people said.
See the full text of the Packard Foundation's announcement.
* * *
Heard on the Street: Deal Exposes Bleak Future of the Computer Business
H-P Blames Foundation's Risk Aversion for Its Rejection of Planned Compaq Deal
The company plans to counter some of what the Packard foundation has said about the deal -- that it is too focused on PCs and bad for H-P shareholders. It will make its case in regulatory filings, they said. In addition, the company will hold an analyst meeting in early January and meet individually with large institutional shareholders to try to sell them on the acquisition's merits.
Many analysts believe Ms. Fiorina would be forced out of the company if the deal collapses. She has been thrust into a battle over the legacy of H-P and criticized for her acquisition strategy. Initially hailed as a much-needed outside leader for the 62-year-old company, the 47-year-old executive has consolidated businesses and reorganized the company to make it more customer-oriented and focused on the Internet.
But she also has been criticized for being too aggressive with her financial targets that the company either missed or had to ratchet back for four quarters in a row. The personal-computer business remained a drag on earnings.
Customers of both H-P and Compaq say they are sensing rising levels of anxiety among employees of the two computer makers -- and the clients are wondering how a failed merger would affect them. Rob Koehnemann, president of electronics dealer Inacomp Data & Voice Systems in Panama City, Fla., says customer uncertainty is rife. "Everyone is holding their breath to see if the deal goes through; everything is really up in the air," says Mr. Koehnemann, who resells H-P laser printers and Compaq personal computers.
What is more, Mr. Koehnemann said many H-P and Compaq workers are distracted by the merger news. "It's mostly disruptive to employees of both," he says. "They're all concerned over whether or not they'll have their jobs." Still, he notes, even though clients aren't sure what will happen, they are so far "assuming that both companies are going to survive" so they aren't putting off purchases of H-P or Compaq products. At this point, customers are "still going to get products whatever happens."
Mark de Visser, vice president of marketing for software developer Red Hat Inc., Durham, N.C., says the company has been working with both H-P and Compaq for the past few years and intends to continue the relationships. But "we have noticed an anxiety on their end -- there's been fewer long-term commitments because they don't know what will happen with the deal," Mr. de Visser says.
Rebeca Robboy, a spokeswoman for H-P, says the company has been "aggressively" communicating with clients. "We have designed our integration process to work in a way that ensures we are focused on customers and don't get distracted," Ms. Robboy says. "We are pressing ahead with the merger because customers should note this deal is about them, so we can provide a broader range of solutions and products to meet their needs."
Sabre Holdings Corp., a travel-reservation system operator and a Compaq customer, wouldn't comment on the merits of a merger but said it hoped the uncertainty ends soon. "What we hope for as soon as possible is closure," said Craig Murphy, Sabre's chief technology officer.
Write to Gary McWilliams at gary.mcwilliams@wsj.com, Molly Williams at molly.williams@wsj.com and Pui-Wing Tam at pui-wing.tam@wsj.com |
