HP to face sceptical investors on Compaq
By Elizabeth Wine in New York and Scott Morrison in San Francisco
Published: December 20 2001 22:46 | Last Updated: December 20 2001 23:38
When Hewlett-Packard management hits the road early next year to push its $21.8bn bid for Compaq Computer, they will be battling for the support of institutional investors, who are willing to listen, even if some remain sceptical.
With the Packard and Hewlett foundations planning to vote the 18 per cent of shares they control against the deal, its fate lies with the institutions, which control 57 per cent.
Carly Fiorina, HP's chief executive, said this week that a number of large institutions liked this deal and had been buying HP shares aggressively.
However, she declined to identify the deal's supporters and conceded that most large shareholders remained uncommitted. The company said that while it was "doing an inventory" of institutional investors, HP was "not tallying a vote yet".
Industry analysts have said HP has to win support of two-thirds of institutions.
The company will face questions on a number of broad fronts. Perhaps the most significant concern centres on whether HP and Compaq management can successfully tackle the massive integration challenge they would face should the deal win approval.
"Even if you grant this deal is strategic, I can't grant there's evidence they're good executors," says one of the top shareholders.
Other investors had more fundamental questions about whether the transaction had strategic value. Some are eager to hear HP's sales pitch because they are unsure of the benefits, in spite of the media coverage.
John Serhant, chairman of the investment committee of State Street Global Advisors, the asset management arm of the Boston bank, says it is still unclear where the synergies lie. He is unsure "whether their strategy is to be a top-line support services business, or a commodity business, like PCs".
SSGA is one of the two largest managers of index-tracking portfolios in the country and was among the top-five HP shareholders as of September. Mr Serhant also argued there is "a tremendous history of big tech deals not working".
This is a common refrain among institutions, an argument another portfolio manager says hasn't been effectively rebutted. "There is almost an arrogance with which they have approached this deal," he says.
HP has started to address this point, arguing that this deal differs from previous mergers because it involves similar businesses, rather being designed to gain a new technology or move into a new area.
Barclays Global Investors, the other large index tracker, has said it will hand its vote over to Institutional Shareholder Services, a small but influential proxy advisory group. Public statements from ISS have not been positive on the deal, but the group stresses it will not begin analysing the deal until after the final proxy statement is sent to shareholders early next year.
Another challenge for Ms Fiorina will be to convince HP investors to accept the dilution of the company's printing and imaging franchise. Investors are concerned about the impact on earnings if the printer business's high-margin revenue contribution is reduced from nearly half of the company's total revenues to about 25 per cent.
Several investors believe HP's share price is almost entirely accounted for by the printer business, with the PC and server businesses essentially discounted almost to nothing.
"That's fundamentally the issue that's hard to understand. They are underperforming in the businesses where they're adding exposure and the core franchise they're diluting from almost half the revenues to a quarter," said Gus Zinn, technology analyst at Waddell & Reed.
Furthermore, shareholders want to be reassured that combining HP and Compaq won't drive customers into the arms of competitors. The company has forecast a 5 per cent drop in revenues immediately after a merger, followed by annual revenue gains that exceed market averages as of 2003.
But a portfolio manager at one of HP's 20 largest institutional shareholders said management has not yet backed up those claims. "The bigger issue is after the merger is done. How do they accelerate revenue growth?" he asked.
HP exudes an aura of confidence about its planned acquisition, despite recent speculation it would never reach a shareholder vote. Company officials maintain they are halfway through a long process and that they will slowly win over shareholders as they learn more about the merits of the deal.
HP is counting on its road show to sway the sceptics. It released this week a position paper that makes a stronger case than previously.
If Ms Fiorina and her team fail to convince the doubters, she might take some comfort in the thought that institutional shareholders often vote with their feet.
"Those who don't like the deal get out and those who do get in." she said. |
