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Trust opposes HP-Compaq merger, puts deal in doubt

The largest single shareholder in Hewlett-Packard Co said on Friday that it would oppose the company's acquisition of Compaq Computer Corp, dealing a potentially mortal blow to the merger spearheaded by HP chief executive Carly Fiorina.

The David and Lucile Packard Foundation, which holds 10 per cent of HP's stock, said it had made a preliminary decision to vote against the merger.

The decision unites all the children of HP's founders against the deal, creating an opposition block of 18 per cent of the company's stock and a public relations nightmare for management.

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, 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, where he initially voted for the merger. Hewlett first voiced opposition to the deal last month.

Analysts said the latest developments could spell the end of Fiorina's stewardship of the technology bellwether, which she argues must reinvent itself as a services and high-end computer powerhouse.

Many investors have opposed the plan from the outset, arguing that the deal would saddle HP with a bloated, low-profit personal computer business and lose customers and sales while management was distracted by the overwhelming task of integrating a global work force of 135,000.

HP shares jumped to $25 in after-hours trading from a close of $23.52 on the New York Stock Exchange. Shares of Compaq, which investors have seen as getting the better end of the deal, tumbled 12 per cent to $10.01.

"The street has voted on this (deal) from Day One," said Ashok Kumar, an analyst at US Bancorp Piper Jaffray. "The song of the dodo has a new meaning. It is as good as dead at this point."

NOT OVER YET?

But some analysts hesitated to dismiss the ability of Fiorina, who was brought in to shake up the 62-year-old company in July 1999, to fight back and clinch the deal.

"I don't think it's over yet," said John Buckingham, a portfolio manager at Al Frank Asset Management of Laguna Beach, California, which has a few thousand shares of each stock. "But it doesn't look good."

It would be difficult to amend the merger to address the most serious criticisms, such as the charge that the combined company would be too exposed to low-margin products, including personal computers, analysts said.

On the other hand, changing the terms of the merger, perhaps hiving off the PC business, could be the last, best hope of management, others argued.

George Elling, an analyst for Deutsche Banc Alex. Brown and one of the few on Wall Street who supported the deal, noted the Packard foundation had called its decision preliminary, which management might take as an invitation to haggle.

Elling said: "They could go back and say, 'What would make you change your mind?' I am sure that between Hewlett-Packard and Compaq, they are discussing all their alternatives at this time."

Roy Papp, head of fund managers L. Roy Papp & Associates, which has about 800,000 HP shares, said it was unlikely the founding families of Palo Alto-based HP would agree to divest the PC business to make the merger work. HP spun off Agilent Technologies Inc., its test and measurement unit, in 1999.

"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.

HP could also negotiate a cheaper price for Compaq, Sanford Bernstein analyst Toni Sacconaghi said.

In his Friday statement, 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 on September 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 the terms of the deal, citing the regulatory review of the merger in the United States and its pending review in Europe.

If those antitrust 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 is likely to leave -- or to be forced out -- since shareholders would have rejected her vision for the company, analysts and investors agreed, almost unanimously.

"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."

Lehman Brothers analyst Dan Niles predicted, "If the deal doesn't get done, she's gone."

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