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Rejected by family, HP woos outsiders on Compaq deal

Rejected by the founding families of Hewlett-Packard Co, the fate of chief executive Carly Fiorina's ambitious bid to acquire Compaq Computer Corp now rests with the professional fund managers who constitute a silent majority of shareholders.

Fiorina faces an uphill fight to clinch enough of their support to close the deal, but at least the money managers she must win over are paid to weigh risks solely against potential rewards, without regard to family legacy or corporate tradition, analysts said.

Friday's decision by a Packard family foundation, HP's largest shareholder, to side with the other children of company founders Bill Hewlett and Dave Packard against the deal, struck a potentially fatal blow to the merger by creating an opposition block of 18 percent of the company's stock.

Assuming all shareholders were to vote on the merger, Fiorina and management would have to secure the support of more than 61 per cent of remaining investors -- a diverse group including institutions and individuals -- to secure an absolute majority.

"They've just lost the first three games of the World Series. They can still win, but they've got to play incredible ball," said George Elling, an analyst at Deutsche Banc Alex. Brown and one of Wall Street's few supporters of the deal.

Relief could come from a chief advisor to the mutual funds, insurance companies and other institutional investors which has not taken a position on the $25-billion deal.

ROAD SHOW ROLLS ON

Institutional Shareholder Services, an influential stockholder advisory company that sells its analysis to some 950 institutions, is likely to be the next target for Fiorina and Compaq chief executive Michael Capellas.

Hewlett-Packard spokeswoman Rebeca Robboy said executives planned to meet with ISS, although she declined to say when.

"We believe the more the investment community, including ISS, knows about the benefits of the merger, the greater the likelihood they will support it," she said.

J P Morgan analyst Daniel Kunstler, wary of the merger's chances, said ISS would be hard pressed to ignore the analysis by technology consultant Booz-Allen, which had been hired by the David and Lucile Packard Foundation and appeared to have concluded that the merger would hurt HP.

Shares of HP jumped 6 per cent to $25.01 in after-hours trade Friday following the Packard trust's announcement, and Compaq, seen as getting the most out of the merger, tumbled 12 percent to $10.00, showing the skepticism toward the deal.

But time may be on management's side. Fiorina's team won some grudging support in November when they announced quarterly results that beat analyst expectations.

Charitable funds, like the Packard foundation, look to preserve capital and invest conservatively, while fund managers in technology stocks, aiming to profit in an uncertain environment, have a higher tolerance for risk, analysts said.

'WE'RE STILL MAKING MONEY'

"We're still making money, compared to a lot of other companies -- Sun Microsystems, EMC Corp and others," Webb McKinney, the HP executive in charge of the merger integration team, said in an interview.

Also, Rockville, Maryland-based ISS may not take a definitive stand for some time. Hewlett-Packard does not plan to send out a proxy ballot on the merger, on which ISS would make a recommendation, until early next year, and does not expect a vote until late February, at the earliest.

The founding families will vote 18 per cent of HP stock against the merger. Retail investors appear to have a further 25 per cent, leaving institutional investors 57 per cent.

Walter Hewlett, the first family member who publicly opposed the deal, has said it would saddle the company with a big, low-profit personal computer division and dilute the value of the printing division, but the Packard foundation referred to its own best interests and said it understood the strategic considerations being addressed by management.

HP and Compaq say they will create a high-end computer and technology services powerhouse that can offer customers nearly everything they need, which they say is the key to growth.

Analysts have said the problems of integrating the companies present the biggest risk to the merger, should it go forward, putting the spotlight on McKinney.

He said he was taking an "adopt-and-go" approach to choose the best from each company, rather than trying to find a new and perfect third solution, in order to move quickly.

McKinney and Jeff Clarke, Compaq's chief financial officer, were working out details to the level of such nitty gritty as reconciling HP employees' inclination to use voicemail for urgent messages with Compaq's e-mail priorities, he said.

The softer economy, which critics say forced two hurting companies together, favours the merger, he added.

"It's the very best time to be doing it," he said. "The odds of losing significant business are much less in a downturn than when things are booming."

So far the market has seen this as a defensive marriage of two struggling companies, but investors have acknowledged Fiorina's and Capellas's grit, even while panning their plan.

"I've never seen two people beaten up as these two CEOs have been, and I've not seen two people more determined as these two," said Harshal Shah, a fund manager at Fremont Investment Advisors.

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