H-P faces near-term struggle
The merger vote's official. So now what?
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 9:18 PM ET May 1, 2002
PALO ALTO, Calif. (CBS.MW) - Hewlett-Packard got a much needed rubber stamp Wednesday, as the company learned - officially - it has won shareholder approval for its acquisition of Compaq Computer by 45.3 million votes, or about 3 percent of shares cast.
Now comes the hard part, as customers, employees and shareholders start counting the milestones the combined company needs to hit to show the world - especially the 48.2 percent of shareholders who voted against the deal - that the largest tech company integration ever attempted remains on track.
"There are two important things the company must provide next - product roadmaps to customers, and they need to let all employees know where they stand," said Martin Reynolds, an analyst with Gartner Group. "Employees don't work well when they're not sure if they'll have a job in three to six months."
First things first for Hewlett-Packard: H-P's management expects to legally close the merger by the end of this week. The release of the official share vote tally, along with Tuesday's dismissal of dissident shareholder Walter Hewlett's suit that sought to block the merger, seems to put the company in a position to do that.
In a final report by vote-counting service IVS Associates Inc., 51 percent of shares, or 838,401,376 proxies, were cast for the merger, while 48.2 percent of shares, or 793,094,105 proxies, were voted against the deal. About 0.8 percent, or 13,950,651 shares, were cast, but undecided. A vice president from IVS confirmed the figures, which H-P reported late Wednesday afternoon.
It's also now clear that Walter Hewlett will devise further attempts to stop the merger. On Tuesday, Hewlett, son of H-P co-founder William Hewlett, issued a statement that he would do all he could to support the joint companies, saying it's in the best interest of shareholders at this point.
Hewlett had opposed the merger in a fierce proxy battle. When it became clear he was likely to lose the contest, he sued H-P, claiming management misled shareholders with financial projections and essentially bought votes from a key investor.
H-P (HWP: news, chart, profile) plans to officially launch the new company with a ceremony in Silicon Valley on Tuesday. It's a chance for management to mend some bridges with both employees and investors.
The plan is tentative, but so far, management expects to host a news conference from the company's offices in Cupertino, Calif., and CEO Carly Fiorina will make a separate broadcast to employees.
During the launch, customers will be the company's top priority. H-P plans to start handing out "playbooks" so all customers know who to contact for sales, services help, problem-solving and other issues.
Management also is expected to offer at least a preliminary list of the products the new company plans to carry, and how long the company will support product lines it will eventually discontinue. Not all product roadmaps will be immediately available.
Shortly after the launch, the company expects to turn its attention to employees - perhaps the most difficult near-term challenge for the new company.
Employees have been polarized by the bitter proxy dispute, all the while knowing that if the merger passes, it brings with it a guarantee of 15,000 job cuts.
Thousands of H-P's employees, mainly upper-level executives, already know their job assignments. In recent months, H-P offered bonuses to 6,000 managers it considered critical to the merger, and named first-tier and second-tier managers at the new company.
H-P is slowly moving down the chain of command. The company announced internally a third-tier of management at the new company on Friday.
Jobs are also fairly secure among the 1,200 employees working to manage integration between H-P and Compaq (CPQ: news, chart, profile). Most will stay in their positions for at least another year.
As for the rest of the combined company's 150,000 employees, launch day will provide few answers. H-P's management has said it plans to make strategic and organizational decisions, "as quickly as possible."
"Our intent is to announce decisions around job selection and reduction as soon as we can," the company said in a filing with the Securities and Exchange Commission in March.
It could take several months to figure out who stays and who goes under the new regime, analysts anticipate.
Some employees will be chosen under an "adopt and go" strategy, where management chooses to keep entire teams of employees from one company or the other, based on a market or technology advantage.
But many H-P employees will not know as of launch day if their organization falls under "adopt and go". Many must wait to find out if they have to re-apply for positions.
Over the next two or three quarters, H-P is likely to rack up its steepest merger-related charges, as it begins to organize the new company. In addition to employee severance, analysts anticipate costs for work to marry internal technology systems and business processes, as well as charges for the estimated $100 million the company spent on its proxy fight.
As far as Wall Street goes, shareholders should begin to see the company start to achieve some of its first merger-related goals within the next 12 months, analysts said.
Within just three to four months, a major goal will be to consolidate the sales force of the new company, says Rob Enderle, analyst with Giga Information Group. It will be critical to meeting future revenue goals, he says.
"If the sales force is still confused on who reports to whom, they won't be able to execute in time to meet targets," he said.
He added that the company must also show shareholders that the new company is working to improve its image with customers, which he says was tarnished during allegations of shady dealings during the merger fight. Part of improving its image might require bringing in new marketing executives from outside H-P or Compaq, Enderle said.
By this time next year, H-P should be able to trim its sales, general and administrative costs to about 16 percent of revenue, down from about 20 percent today, according to Giga's Reynolds.
In particular, he expects to see the company pare its losses in the personal computer business, by making companywide use of Compaq's direct sales channels.
The company also should be able to show an improved cash flow within 12 months, Reynolds says. Better cash generation is a goal management touted as a major shareholder benefit of the combination.
"If by this time next year, revenue is declining and there's no cash flow improvement, they're making no progress at all toward their goals," Reynolds said. "If they can't do that after a year, they'll have a harder time doing it after two years."
Several analysts anticipate that H-P will face many challenges in making its large-scale tech merger work, just because others failed, including H-P's acquisition of Apollo and Compaq's purchase of both Digital Equipment and Tandem Computer.
It was an argument Walter Hewlett used exhaustively in his efforts to fight the deal.
H-P's management counters that they have dedicated more hours and more employees to its merger integration than any deal in the past.
Ultimately, Reynolds says that planning, or lack of it, won't determine the success of the new H-P. But meeting its incremental goals will.
"This is not a sit back, relax and enjoy the ride type of merger," he said. "This is a take no prisoners, make it work merger."
H-P stock slipped 24 cents on Wednesday to close at $16.86. Compaq shares added 50 cents to $10.65. |
