March 19, 2002 03:06
Key Issues May Sway H-P Vote
By Crayton Harrison, The Dallas Morning News
Mar. 19--The barnstorming and mudslinging will be fresh on the minds of Hewlett-Packard shareholders Tuesday as they cast their last votes on whether to acquire Houston's Compaq Computer Corp. But the $21 billion merger won't be decided on words alone.
Shareholders will be partially swayed by the way H-P's management team and its opponent, dissident H-P board member Walter Hewlett, portray themselves and each other, analysts said. But investors are also thinking carefully about the financial merits or pitfalls of the merger, analysts said.
"This is going to be one of the most well-informed groups that ever voted in a proxy," said Rob Enderle, an analyst at Giga Information Group in California.
Ever since the Sept. 4 announcement of the stock-swap merger, H-P chief executive Carly Fiorina and Mr. Hewlett, son of one of the company's founders, have been arguing over the state of the PC industry and the risks of mega-mergers.
The merger was originally worth $25 billion, but H-P shares started to drop after the deal was announced.
Here's a look at the arguments that could have the largest effect on the merger vote.
--Big tech mergers: Mr. Hewlett has pointed repeatedly to large technology industry mergers of the past, noting how companies struggled to make them work.
Tech companies that merge have the difficulty of keeping customers and reconciling overlapping products in the high-stakes, fast-moving technology industry, Mr. Hewlett said.
"A merger of equals is the toughest kind of integration to pull off," he told analysts in a conference call last week. "And this transaction is bigger and more complex than any previous technology deal."
Michael Capellas, Compaq's CEO, has dealt with big mergers before. He came to the helm of Compaq after the company's tumultuous acquisitions of Digital Equipment Corp. and Tandem Computer Corp.
Mr. Capellas would become chief operating officer at the new H-P, giving him control of the company's day-to-day operations. That could help the companies make it through a tough integration, analysts said.
But even supporters of the merger note it will take intricate planning and perfect execution.
--Commodity computing: H-P and Compaq managers believe the merger would help the combined company grab a large chunk of market share for personal computers and inexpensive servers, allowing it to outpace rivals in a fiercely competitive market by reducing the costs of making and selling the computers.
But Mr. Hewlett thinks the merger would expose H-P too much to the PC and server markets. Because of the price wars, PCs are not a very profitable business unless the computers are sold extremely efficiently, the way only Dell Computer Corp. has figured out how to do, Mr. Hewlett has argued.
"We would have approximately $30 billion of commodity computing revenues in the merged entity, in a business model that is not competitive with Dell, where Dell sets the prices," Mr. Hewlett said. "This is a huge vulnerability."
But Compaq has already improved its efficiency and could bring the lessons it learned to the combined company, said Dan Niles, an analyst with Lehman Brothers in New York.
"H-P/Compaq would not be as good as Dell, but it would bring them a lot closer than they are today," Mr. Niles said. "If you let the Compaq guys get in there and make hard decisions, it could get better."
H-P's most profitable division is imaging and printing, which includes its printers, ink cartridges and digital cameras. Compaq doesn't have a similar division, so in a combined company, imaging and printing would make up a smaller portion of the overall business, Mr. Hewlett said.
"This makes no sense at all," he said. "Imaging and printing is a higher growth market with higher margins. We shouldn't dilute it."
Ms. Fiorina and Mr. Capellas say the combined selling power of the two companies will mean even more profit for the imaging and printing division. Institutional Shareholder Services, the advisory firm that recommended its clients vote for the merger, noted in its report earlier this month that the division might reap side benefits from the merger, too.
"The restoration of H-P's PC business to profitability will remove a significant drain on H-P's resources and improve the company's ability to invest in these high-growth markets," the report said.
But Mr. Hewlett said H-P shouldn't assume it can make PCs profitable enough to increase investment in imaging and printing.
H-P and Compaq have both been trying to transform themselves into technology services companies, designing and running clients' computer systems.
The merger, they argue, will bring them one step closer to competing with the firm that already made that transition -- International Business Machines Corp. The merger would give the combined company a better array of products to offer clients, and a giant sales force to build its client base, Peter Mercury, the general manager of Compaq's services division, said in a February interview.
"This gives us critical mass," Mr. Mercury said. "We are much more likely to be viewed as a strong and viable alternative to IBM global services."
Mr. Hewlett says he thinks it would be better to expand H-P's own services division instead of taking the risks of the Compaq merger.
The combined company wouldn't be a rival to IBM's services unit immediately, said Russell Price, an analyst with H&R Block Financial Advisors.
"It does not take them to where IBM is today, but it does give them a pretty good jump," Mr. Price said. "The merger is not going to give them a similar offering against IBM. But it more closely matches the IBM model, which they can grow into."
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