Hewlett-Packard deal for Compaq opposed
By Cesca Antonelli
Bloomberg News Service
LOS ALTOS, California — Hewlett-Packard Co.'s biggest shareholder decided to oppose the proposed $25.4 billion purchase of Compaq Computer Corp., threatening to derail the deal and delivering a blow to Hewlett-Packard Chief Executive Carly Fiorina.
The David & Lucile Packard Foundation owns 10.4 percent of the second-biggest computer maker's stock. The shares of Hewlett- Packard, which wants to acquire Compaq to boost sales of server computers and services, jumped as much as 8.4 percent on the news, while Compaq sank 12 percent.
Fiorina now faces opposition from all the children of co- founders William Hewlett and David Packard, who together control more than 16 percent of the company's shares. The decision casts doubt on Fiorina's strategy and may encourage other large institutional shareholders to vote against the acquisition. If the purchase fails, Fiorina could lose her job, investors said.
"It's dead," said Doug Johanson, principal at Vista Capital Partners Inc., which owns Hewlett-Packard and Compaq shares and manages $50 million. "They're going to have a hard time overcoming all of the recent statements, now that all the major trusts and foundations have come out against it."
Companies Committed
In a joint statement, Compaq and Hewlett-Packard said they are disappointed with the foundation's decision and are still committed to the purchase. Compaq spokesman Arch Currid declined to elaborate.
Hewlett-Packard spokeswoman Rebeca Robboy said the Palo Alto, California-based company will continue to give investors additional information to try to convince them that the purchase is in their best interest. She said executives hope the family members will change their minds based on that information. She wouldn't say what the details would be.
Fiorina and Compaq Chief Executive Michael Capellas declined to be interviewed, company officials said.
Hewlett-Packard shares climbed to $25.50 after the announcement. They rose 19 cents to $23.52 in regular U.S. trading today. Houston-based Compaq slid to $9.97 on the news, after gaining 21 cents to $11.32 in regular trading.
Both companies' shares slid after Fiorina and Capellas announced the all-stock acquisition Sept. 3. Hewlett-Packard bounced back just this week to August levels, and Compaq has slipped 8.3 percent since Aug. 31. Compaq shares are trading 24 percent below the current value of Hewlett-Packard's per-share offer.
"The deal was dead right from the start," said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray, who rates Compaq a "buy." "There was no strategic rationale. For them to continue this charade would be like having two clowns without a circus."
Founders' Families
As of Dec. 31, 66 percent of the David & Lucile Packard Foundation's $9.6 billion in assets were in Hewlett-Packard shares. In a statement, Chairwoman Susan Packard Orr said the Los Altos, California-based foundation's interests would be better served if Hewlett-Packard continues to operate on its own.
Foundation spokesman John Walker declined to elaborate on the statement.
Last month, Hewlett-Packard director Walter Hewlett, his sisters Eleanor Hewlett Gimon and Mary Hewlett Jaffe, and David W. Packard said they would vote against the deal because it would make the company more reliant on low-profit personal computers and require too many firings.
Other investors agree. The PC business is in its worst slump in 15 years, and shareholders say they'd prefer the company to focus more on its profitable printer and supplies unit.
"It's the wrong direction for the company, to be adding revenue in very competitive commodity-like lines of business and diluting their best business, printing and imaging," said Tom Rath, a fund manager at Safeco Asset Management Co., which has been selling Hewlett-Packard and Compaq shares.
Walter Hewlett will solicit proxies against the deal if Fiorina does bring it to a vote, he said in a statement. "There is sizable and widespread opposition to this transaction," he said.
Chilly Reception
Fiorina, a 47-year-old former Lucent Technologies Inc. executive, was hailed early in her tenure at Hewlett-Packard for reinvigorating the sales force and encouraging closer ties between company divisions.
Those steps haven't been enough to convince shareholders she's the right person for the job, after a string of missed sales and profit targets and failed acquisitions. Fiorina scrapped plans to buy the consulting arm of PricewaterhouseCoopers LLC for as much as $18 billion last year. Last month, it lost a bid to purchase Comdisco Inc.'s computer disaster-recovery unit to SunGard Data Systems Inc.
"She's on thin ice," said Todd Ahlsten, whose Parnassus Investments owns shares of both companies. "This will be the second major deal that's gone down. When the board sits down and looks at Carly managing the business independently, is she the person they want?"
Hewlett-Packard, founded in a one-car Palo Alto garage in 1939, is credited with helping to create Silicon Valley's reputation as a breeding ground for technology companies. The corporate culture the duo built became known for giving its workers a say in decision-making and "management by walking around."
Hewlett-Packard and Compaq say that combining would save $2 billion in fiscal 2003, and the computer makers plan to fire a total of 15,000 workers. Fiorina said in October that she would bring the purchase to a vote no matter what.
"We're not going to back off this deal prior to a shareowner vote," Fiorina said in an interview at the time. "Period."
