COMPUTER MEGAMERGER
H-P Claims Victory in Merger Vote, But Full Results Could Take Weeks
By SCOTT THURM, PUI-WING TAM and GARY MCWILLIAMS
Staff Reporters of THE WALL STREET JOURNAL
As of 11:02 p.m. EST Tuesday, March 19, 2002
Hewlett-Packard Co. claimed a hair's-breadth victory in its fight for shareholder approval of the company's $21.4 billion acquisition of Compaq Computer Corp.
But the margin was so narrow that dissident director Walter Hewlett, who led the campaign against the merger, said the outcome of the vote remained "too close to call." He refused to concede defeat until the votes of all 900,000 H-P shareholders were officially tallied, a process that could take as long as seven weeks.
On an extraordinary day that some hoped would cap a landmark struggle over the future of two computer-industry titans, a person close to Mr. Hewlett said H-P's preliminary margin of victory was less than 1% of the votes, or 20 million shares. A spokeswoman for H-P disputed his assertion that the margin was that close.
In brief remarks outside H-P's shareholder meeting in Cupertino, Calif., H-P Chief Executive Carly Fiorina declined to offer vote totals, calling her company's victory margin "slim but sufficient." In a reference to the disputed 2000 presidential election, she said there were no "dimpled, hanging or pregnant chads" to compromise the results.
The person close to Mr. Hewlett claimed that the start of the H-P shareholder meeting was delayed for 30 minutes because the company was still lobbying large institutional investors, including the Deutsche Asset Management unit of Deutsche Bank AG, which had previously voted its 25 million shares against the deal. Deutsche Asset Management switched roughly half of its votes Tuesday morning, this person said.
The H-P spokeswoman declined to comment, saying it would be inappropriate for the company to discuss the votes of specific shareholders. She added that the meeting started half an hour late because the company was waiting for some attendees to find parking. A spokeswoman for Deutsche Asset Management also declined to comment.
H-P's declaration of victory was based on a preliminary count early Tuesday morning of the white proxy cards that shareholders had returned to the company's two proxy-solicitation firms. But since shareholders had until midmorning, when voting closed, to change their minds, some doubts about the results of the voting linger, pending a final count.
Still, David Katz, a money manager at Matrix Asset Advisors who had publicly come out against the deal last year, said he believed H-P's claim that it had prevailed. "It's less than imaginable that H-P would come out with misinformation about the vote result," he said.
Shareholder ratification of the deal would be a huge coup for Ms. Fiorina, who effectively staked her job on the outcome. Ms. Fiorina, a marketing whiz hired three years ago to revive H-P, beat tough odds by tirelessly and personally wooing wavering shareholders. Her pitch: H-P needed to add scale and cut costs to compete in a rapidly consolidating industry.
A victory would clear the way for the largest high-tech merger in history, creating an $80 billion-a-year behemoth that hopes to win a bigger share of corporate-technology budgets while reversing losses in the cutthroat personal-computer business. But it would also present Ms. Fiorina with a new and perhaps equally daunting set of challenges. Among them: uniting a divided company, reassuring nervous employees and appeasing restless shareholders. Shareholders' unease was clear at Tuesday's meeting, at which Mr. Hewlett was welcomed with a standing ovation and Ms. Fiorina was booed several times.
The divisions inside H-P would complicate the typically tortuous path of a high-tech merger, which has hobbled many seeming conquerors. That list includes Compaq, whose stumbles after its 1998 acquisition of Digital Equipment Corp. helped drive the Houston-based computer maker into H-P's arms.
A reversal of the preliminary results in the final count would be a big blow to H-P and Compaq, leaving both companies without clear plans for confronting a difficult high-tech landscape.
At H-P, Ms. Fiorina might depart, and her successor would still have to mend the divided company. Compaq would face difficult choices it was hoping to avoid by merging with H-P, such as what to do with its consumer PC business, some of its business-computer offerings and even its well-regarded computer-storage arm. And both companies would have to unscramble six months of planning toward a joint future, including moves toward eliminating some products.
Ms. Fiorina sought to persuade shareholders that the risks of combining H-P with Compaq were smaller than the risks of H-P's continuing to fly solo, possibly without Ms. Fiorina and much of the current board. "There aren't enough negatives to the deal to say" its approval would "torpedo the stocks," says Kevin McCloskey, a fund manager at Pittsburgh-based Federated Investors Inc., which voted its 3.3 million H-P shares in favor of the merger.
Investors had been betting against the deal since it was announced in September. On Tuesday, H-P shares rose and Compaq shares fell in early trading, apparently on the belief the merger would be defeated. But those directions reversed after H-P declared victory, as investors scrambled to close the gap between Compaq's share price and what those shares would be worth if the deal were completed. In 4 p.m. composite trading on the New York Stock Exchange, H-P shares fell 45 cents, or 2.3%, to $18.80, and Compaq shares rose 78 cents, or 7.5%, to $11.14.
There's evidence that Ms. Fiorina understands the deep fissures inside H-P. Tuesday, she told opponents of the merger that "when the ground has cooled, we hope we can put rancor aside and find common ground." In a conciliatory gesture toward the Hewlett and Packard families, who both opposed the deal, she added, "The company will always be proud to bear your names."
It won't be easy. For one thing, Mr. Hewlett Tuesday signaled that he won't go away without a fight. In a news conference at a hotel near the H-P shareholder meeting, where he was flanked by his wife and son, Mr. Hewlett said he is "optimistic" that his antimerger forces might still prevail because "the result isn't known and the margin is certainly razor thin." He added that he hoped to stay actively involved in H-P. "I would like to stay on the H-P board. I think I could add value to this company," he said. He also joked that for the time being, he would resume his activities as a "musician and an academic."
A line of H-P holders wait to enter special meeting Tuesday morning.
Shareholders started arriving at 5 a.m. for the 8 a.m. meeting in a community-college auditorium. The 2,500 attendees included many current and former H-P employees, as well as about a dozen Compaq employees from France, who came to protest the merger. Mr. Hewlett received standing ovations before and after a brief speech, in which he called H-P representative of "a unique vision of the best an American corporation could be."
Ms. Fiorina was booed several times when she observed that the "majority" of H-P employees "understand and support this merger." She replied: "Ladies and gentlemen, this is a fact."
Some of the rancor Ms. Fiorina faces at H-P predates the Compaq plan. For two years after her 1999 appointment as the first outsider to run H-P, Ms. Fiorina waged a covert war against a corporate culture perceived by some as balkanized and too relaxed for modern-day Silicon Valley. The merger debate forced this war into the open, with the families of the company's co-founders arguing that Ms. Fiorina was betraying the founders' legacy. Even Lewis E. Platt, Ms. Fiorina's predecessor as CEO, argued against the deal as a representative of the David and Lucile Packard Foundation.
Polls commissioned by David W. Packard, the founder's son and a former H-P board member, found that roughly two-thirds of H-P employees in Corvallis, Ore.; Boise, Idaho, and Fort Collins, Colo., opposed the merger. In another rebuke, H-P employees voting shares through the company's stock-savings plan opposed the deal by an almost 2-to-1 margin, according to Mr. Hewlett. H-P said its own polls showed employees supported the deal.
"The employee mood is just vicious," said an employee in H-P's finance unit who asked not to be identified. Another employee, an engineer in the unit that makes computer servers and who supports the merger, says some co-workers are so vehemently opposed to the deal that he expects them to quit and "throw away 20 or 30 years" at the company.
If it ends up absorbing Compaq and its 63,000 employees, plus 14,000 contract and temporary workers, "the soul and the guts of H-P as we've known it in the past will eventually fade away," says Jerry Porras, an emeritus professor at Stanford University's Graduate School of Business, and co-author of "Built to Last," a 1994 book that included a chapter on H-P's long-term success.
For its part, Compaq is in many ways still divided by past acquisitions of Digital and Tandem Computers Inc., which involved cost-cutting measures that some employees sought to undermine. In one case, employees leaked information to customers about plans to abandon a product line before Compaq could develop an alternative. In another, employees transferred out of a vulnerable marketing unit, reducing the company's potential savings.
Robert B. Lamb, a management professor at New York University's Stern School of Business, says Compaq is effectively still "three different organizations, three different cultures." Integration with H-P would be a "two-year tunnel," he says, predicting that top performers on both sides would leave.
To top it off, employees of both companies are bracing for the 15,000 layoffs needed, if the merger goes through, to help H-P and Compaq cut a promised $2.5 billion in annual operating expenses. "People are almost paralyzed," the H-P finance-unit employee says.
H-P executives understood from the beginning that integrating the two companies would be difficult. They created an unusually detailed integration-planning team, headed by senior executives on both sides, that grew to include more than 900 full-time workers.
The heads of the new H-P's four divisions were named when the merger was announced in September. The day after the deal closes, the companies say, they would announce detailed product roadmaps and name the sales teams for their top 100 customers.
In personal computers, for example, the companies are expected to graft Compaq's commercial business onto H-P's consumer efforts. The companies also plan to phase out Compaq's computer servers that use the Unix operating system, in favor of H-P machines.
Some insiders say they expect employees to quickly close ranks if the merger takes place.
"We care too much about the company not to pull in the same direction," says Kathy Frederickson, a 16-year H-P veteran who sells servers to businesses in Minneapolis. Ms. Frederickson knows plenty of co-workers who opposed the merger, but says she's seen little "polarization" or paralysis.
Jeff Christian, the headhunter who recruited Ms. Fiorina for H-P, says that despite her brusque public image, Ms. Fiorina would be able to knit the fractured companies together. "She doesn't give up, ever," says Mr. Christian, who adds that hardly any senior H-P executives have left the company since Ms. Fiorina arrived.
She would also be able to lean on Compaq CEO Michael Capellas, who is slated to become president and chief operating officer of a post-merger H-P. At Compaq, Mr. Capellas is credited with repairing some of the damage to the company after the Digital acquisition.
Ms. Fiorina and Mr. Capellas are both 47 years old and were named to their jobs within three days of each other in 1999. Employees who have worked with the two describe their personalities as like oil and water. But Mr. Capellas says the two have developed a "natural partnership," with Ms. Fiorina orchestrating strategy and leading sales efforts while he focuses on operations. In an interview Tuesday, he disavowed interest in succeeding Ms. Fiorina.
The proposed merger was unpopular with shareholders from the moment it was announced on the evening of Sept. 3. H-P shares fell 19% the next day.
Opposition intensified after Mr. Hewlett, who had voted for the deal as a director, said in early November that he would campaign to defeat it. Other descendants of the company's co-founders, who control 18% of H-P's shares, joined Mr. Hewlett over the following month, and the battle lines were drawn.
The debate often resembled a nasty political campaign, with H-P deriding Mr. Hewlett as "a musician and an academic," and Mr. Hewlett airing private board documents on proposed pay packages for Ms. Fiorina and Mr. Capellas.
A merger would reduce the founding families' influence at H-P. The issuance of roughly one billion H-P shares to former Compaq shareholders would dilute the families' holdings to 12% of H-P's shares, from roughly 18% today. However, under H-P's bylaws, the families may have enough stock to be able to elect their own board member if they choose. Mr. Hewlett said Tuesday that those rules may be subject to interpretation.
Meanwhile, some customers already are defecting. H-P has "lost our confidence," says Marc West, chief information officer at Electronic Arts Inc., a video-game maker in Redwood City, Calif. Electronic Arts has been using Compaq servers to run its EA.com Web site and H-P servers for other tasks. But Mr. West says he worries that some of these products will be discontinued. H-P sales representatives have tried to reassure him, promising the product roadmap, for example, but have been unconvincing, Mr. West says. "We're changing our purchasing plans now, and it's not positive for H-P or Compaq," he says.
Anticipating such opportunities, competitors have been quick on the attack. Mr. West says he gets as many as five calls a week from other computer makers. The pitches frequently aren't subtle. " 'You may want to be aware that such and such H-P or Compaq product won't be a survivor of this deal,' " he quotes one rival sales rep as saying.
Other customers are more optimistic. "If they can make the merger work, it can be a positive thing," says Randy Bradley, chief information officer of Wall Street firm Gruntal & Co. Gruntal buys printers and some PCs from H-P and computer servers from Compaq. Mr. Bradley says he isn't yet sure how the merger would affect his purchases, but he cautioned that it's unlikely Gruntal, or any other big company, would buy all its computing gear from one company.
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Write to Scott Thurm at scott.thurm@wsj.com, Pui-Wing Tam at pui-wing.tam@wsj.com and Gary McWilliams at gary.mcwilliams@wsj.com |
