HP-Compaq Merger in Doubt as Packard Trust Opposes
By Peter Henderson
SAN FRANCISCO (Reuters) - The largest single shareholder in Hewlett-Packard Co. (NYSE:HWP - news) said on Friday it would oppose the company's acquisition of Compaq Computer Corp. (NYSE:CPQ - news), dealing a potentially mortal blow to the merger spearheaded by HP Chief Executive Carly Fiorina.
The David and Lucile Packard Foundation, holders of 10 percent of HP's stock, said it had made a preliminary decision to vote against the merger, meaning all the children of HP's founders, who control roughly 18 percent of the company's stock, have turned against the deal.
HP and Compaq vowed to press forward with the $25.2 billion merger, saying in a statement that they were disappointed by the foundation's position but would campaign in the coming weeks to secure the support of other investors.
Walter Hewlett, the son of founder Bill Hewlett who first voiced opposition to the deal last month, said he would solicit proxies against the merger if management put it to a vote.
``I believe there is sizable and widespread opposition to this transaction,'' said Hewlett, an independent software developer who sits on the board of directors at HP.
Analysts said the latest developments put the controversial deal in peril and could spell the end of Fiorina's stewardship of the technology bellwether if management loses its high-stakes battle to clinch the merger.
HP shares jumped to $25 in after-hours trade from a close of $23.52 on the New York Stock Exchange (news - web sites). Shares of Compaq tumbled 12 percent to $10.01 as traders reacted to the prospect that the merger would not be completed.
``The street has voted on this from day one, and the people who are long-term investors have voted with their feet and they're long gone,'' said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. ``The song of the dodo has a new meaning. It is as good as dead at this point.''
NOT OVER YET
Some investors hesitated to dismiss Fiorina's chances for pulling off the deal, which she has argued is crucial to the future profitability and competitiveness of 62-year old HP.
``I don't think it's over yet, said John Buckingham, the co-manager of the Al Frank Fund at Laguna Beach, California-based Al Frank Asset Management, with 5,000 shares in HP and 10,000 shares in Compaq. ``But it doesn't look good,''
It would be difficult to amend the merger to address the criticism that has been leveled against it, including the charge that it would leave the combined company too exposed to low-margin products, such as personal computers, analysts said.
On the other hand, changing the terms of the merger could be the best remaining hope of management to save a deal, they said.
Deutsche Banc Alex. Brown analyst George Elling, one of the few Wall Street analysts who supported the deal, said the Packard foundation had made a preliminary decision, which management might take as an invitation to change the terms of the transaction.
``They could go back and say, 'What would make you change your mind?','' Elling said. ``I am sure that between Hewlett-Packard and Compaq, they are discussing all their alternatives at this time.''
Papp said it was unlikely the founding families would agree to spin off any more of Palo Alto-based HP, such as its low-margin PC business, in order to make the merger work. HP spun off Agilent Technologies Inc., HP's test and measurement business, which became a separate firm a few years ago.
``I think there's a matter of pride in what the families did in developing this company and I don't think they'd want to see it hacked up in pieces,'' he said.
Hewlett-Packard could also negotiate a cheaper price for Compaq, said Sanford Bernstein analyst Toni Sacconaghi.
In his statement issued on Friday, Walter Hewlett pointed to the decline in Wall Street's expectations for Compaq's earnings in the coming year as evidence that HP was overpaying by offering the equivalent of 90 times forecast 2002 earnings for its Houston-based rival.
Under the proposed terms of the merger announced Sept. 3, HP would offer 0.6325 shares for each share of Compaq outstanding.
``The question to my mind becomes might the price change?'' Sacconaghi said. ``Other than that, I think this is going to be a real dogfight.''
An HP spokeswoman declined to comment on changing terms of the deal, citing the regulatory review of the merger in the United States and its pending review in Europe.
If those anti-trust reviews go through without any complications, HP management would be in a position to take a merger vote to shareholders as soon as February or March, Sacconaghi said.
If the deal does not go through, Fiorina will leave -- or be forced out -- since shareholders would have rejected her vision for the company, analysts and investors almost unanimously agreed.
``I think the company's success will be my legacy,'' Fiorina said in October. ``The company's failure will be my failure, with all the predictable consequences.''
Said Lehman Brothers analyst Dan Niles: ``If the deal doesn't get done, she's gone.'' |
