March 11, 2002 17:37
Battle for HP-Compaq Merger Enters Final Round
By Duncan Hughes, Sunday Business, London
Mar. 10--NEW YORK--The bitter battle for shareholder approval to allow Hewlett-Packard's contested $25 billion purchase of Compaq Computer enters its final week with supporters of the deal sounding more confident but still uncertain of victory.
They had a much-needed boost last week when Institutional Shareholder Services (ISS) reported that it believed the purchase of Compaq would strengthen Hewlett Packard's financial performance over the long run by bolstering its business units, some of which are currently not profitable.
ISS's backing was necessary if the deal was to have any chance of being approved but there is no guarantee that the institutional shareholders, which control 23 percent of Hewlett- Packard's shares, will back the merger. But in a new blow on Friday, Calpers, the biggest US pension fund, said it would vote against, on grounds that it would not bring long term value to its portfolio.
Ironically, the leading protagonists, Carly Fiorina, chief executive of Hewlett-Packard, and Walter Hewlett, a son of the founder, board member and major shareholder, have more in common then they would care to admit, particularly in the final days of the increasingly ill-tempered campaign. Both are talented musicians, love the classics, have advanced degrees in information science and are the children of successful parents.
But for four months they have become implacable foes in a tit-for-tat round of accusations and rebuttals to analysts and in full- page advertisements in major newspapers in which the deal is either described as the saviour or nemesis of the flagging technology flagship.
The latest polling, by Steven Milunovich of investment bank Merrill Lynch, revealed that 26 percent of Hewlett-Packard users were for the deal, 42 percent against and 32 percent unsure. Among Compaq users, 26 percent were for the deal, 46 percent against and 28 percent unsure.
The battle has provided Fiorina with an opportunity to display the advocacy and selling skills she honed climbing the ladder at Lucent Technologies before breaking through the glass ceiling. Fiorina, 47, who embarks on a final round of meetings and speeches this week, is confident enough of success to have printed new pay cheques, designed a website and planned celebrations of the union. She says the merger will close by 1 April.
Hewlett, a 57-year-old who plays 10 instruments, writes sophisticated computer code and is a 15-year veteran on the board, has expressed concern that the merger will expose the company to the weaknesses of Compaq and its increasingly low-margin PC business. His slogan has been: "A $25 billion mistake is not the HP way."
Hewlett believes the merger is too dilutive for shareholders, causes an unfavourable product mix, is too risky and does not address Hewlett-Packard's strategic challenges. He claims the company should adopt a "focus and execute" strategy that spins off the lucrative printing business, selective participation in the embattled personal computer market and shores up the enterprise division with targeted moves in software and services. By doing this the company could offer $14 to $17 more value per share.
According to Fiorina, the purchase would create a leader in markets ranging from PCs to imaging. It would also be a leader in the lucrative IT services industry. There would also be $2.5 billion annual costs savings by 2004.
Supporters of the deal claim it would boost profits 30 percent to $5.6 billion by 2003 compared to 10 percent earnings growth for an independent Hewlett-Packard that would reach about $3.4 billion in net income next year. The combined company would have two major cash generators in the $9 billion ink-cartridge business earning $2 billion a year and computer repair business earning about $1 billion annual profits.
Latest earnings research estimates that Hewlett-Packard would do better in the short term by staying alone but that long-term its product range and productivity could be enhanced.
But whether it could become a computer colossus or another merger mess, such as the Compaq/Digital Equipment deal, is a big caveat given the poor track record of sector link-ups.
According to Patrick McGurn, a vice-president at ISS, it was the key factor that made them endorse the deal.
McGurn said: "We were looking at not only was this a good idea, but could they accomplish this, could they meet the cost savings that they were promising to meet and was this the right management team to execute the plan that was in place."
The stakes are also high for Fiorina and Walter Packard. Her job and status as one of the most powerful women in the corporate world could be determined by the fate of the merger. If Hewlett loses, there is little likelihood he will be on the board.
Hewlett-Packard shareholders will vote on 19 March, Compaq's the day after. US anti-trust regulators are set to approve the deal by then.
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