UPDATE 1-Compaq mulls strategy without HP, still backs deal
December 11, 2001 5:15:00 PM ET
(Adds Compaq, Hewlett-Packard details)
By Caroline Humer
NEW YORK, Dec 11 (Reuters) - Compaq Computer Corp. (CPQ) is planning for a future without Hewlett-Packard Co. (HWP) even though Compaq continues to back the proposed $23.6 billion merger, the company's top executive said on Tuesday.
In a memo to employees, Chief Executive Michael Capellas said he was confident of the company's strategies "whether we are part of the new HP or a standalone company."
Capellas sent the memo after the Packard foundation, which is HP's largest shareholder, said on Friday it would vote against the merger. That made opposition from the Hewlett and Packard families unanimous and effectively created an 18-percent block of founders' stock against the plan.
Capellas further explained his stance during a speech on Tuesday at a New York trade show, saying that having a back-up plan, or a "Plan B" for a strategy in case its merger with Hewlett-Packard doesn't occur is "common sense."
"Obviously ... you would expect us to have a business plan that is ongoing and that is quite frankly what I would call normal responsibility," Capellas said.
Critics of the planned merger -- which would be the largest in the history of the computer industry -- say a deal would saddle computer and printer maker HP with a slow-growing PC business -- in fact the largest PC business in the world.
The PC industry is in the midst of a price war, and thin profit margins needed to compete would dilute the value of HP's higher-margin printing franchise, critics say.
RALLYING THE TROOPS
Compaq's words came as Hewlett-Packard Chief Executive Carly Fiorina rallied Hewlett-Packard employees in a memo released on Tuesday that said times would get tougher before the disputed merger with Compaq could be completed.
Fiorina said she would not back down from the deal and urged employees to deliver results for the current quarter.
"These recent events can be unsettling and distracting for all of us, and I expect the storm to intensify over the weeks and months ahead," Fiorina wrote in the memo, reported by HP in a regulatory filing. "Rest assured that we do not intend to give up, and we will continue our efforts to return this company to greatness."
Hewlett and Compaq have said their similar strategies of increasing services and high-end computing businesses made a merger logical, and Capellas said Compaq would keep to that plan for improving the company in any case.
"Our responsibility is to maintain a pragmatic view of our business and a clear focus on the future," Capellas wrote in his memo. "This isn't just about the merger."
Capellas promised more details in the coming days as the situation is analyzed further.
CAPELLAS ASKS, AND ANSWERS, QUESTIONS
Capellas, who questioned himself in a mock one-man interview about the merger during the last few minutes of a speech at Internet World, didn't address what might be next for Compaq. He was not available for comment after the speech.
He began by asking the question of whether he still supports the merger, something which his own memo had put in question, and questioning why he put out a "stealth" memo.
"So, uh Michael, do you support the merger?," Capellas began. "All right, let it be very clear that I absolutely support the merger."
Investors, however, have been less certain about where Compaq stands, with or without the merger.
Compaq's stock has dropped sharply since the announcement by the Packard foundation late on Friday, falling 21 cents, or 2 percent, to $9.49 on Tuesday after a 14 percent fall on Monday. Hewlett-Packard, meanwhile, fell 4 percent, or $1.01, to $21.99 on Tuesday.
Compaq shares have dropped 37 percent so far this year and Hewlett-Packard stock has lost 30 percent, underperforming the American Stock Exchange Hardware Index, which has declined 21 percent.
Other executives have talked about life after the HP plan. Michael Winkler, the executive vice president of global business units told Reuters last week -- ahead of the meeting by the David and Lucile Packard Foundation -- that Compaq had a bright future with or without HP.
"I think Compaq has a great strategy and if there were no HP we'd still have a great strategy going forward," Winkler said, pointing to positive cash flow and other financial indicators while cheering the merger.
Hewlett-Packard spokeswoman Rebeca Robboy said the company was not considering abandoning the deal or changing its terms.
"Our plan is to bring the deal that we announced in September to a shareowner vote, and we expect to obtain approval," she said. Some analysts now rate the merger with about a one in five chance of going through. Compaq and Hewlett-Packard boards have stood behind the deal. REUTERS
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