Packard Trustees Reject Compaq Deal
Hewlett-Packard Co.’s $25-billion bid to buy rival Compaq Computer Corp. and form the nation’s largest maker of personal computers was dealt an almost-certain fatal blow Friday when HP’s biggest shareholder announced it would vote against the deal.
The David and Lucile Packard Foundation’s rejection of the merger raises new questions about the future makeup of the personal computer industry and HP, a Silicon Valley pioneer fighting to survive a steep industry downturn.
A failed merger also further imperils the job of HP’s highly visible and embattled chief executive, Carly Fiorina, the most prominent woman in American business. Fiorina pinned HP’s future on the belief that buying Compaq could provide tougher competition for rivals such as Dell Computer Corp., Gateway Inc. and IBM Corp., with greater clout to set high-tech industry standards.
Critics, however, have said that the deal puts too much of HP’s future on personal computers, a business in which slowing sales growth and innovation have led to dwindling profits.
The Packard foundation, partly run by the children of the company’s late co-founder David Packard, said Friday that it would cast its shares representing 10% of HP against the merger if a full shareholder vote is reached next year. That comes days after Walter Hewlett, son of the late co-founder Bill Hewlett, said he would fight the merger. Hewlett and Packard heirs control 19% of HP.
Palo Alto-based HP and Houston-based Compaq said they would continue making their case to other shareholders, but HP acknowledgedthat the Packard foundation’s decision was a tough blow. ‘We’re disappointed,” said spokeswoman Rebecca Robboy.
Shareholders and industry analysts said the opposition of the two families means the deal is all but dead.
“To quote Kenny Rogers, the company should know when to hold them and know when to fold them,” said Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray. “To continue to fight this impossible battle is truly against the interests of the shareholders.”
On Wednesday, Fiorina and Compaq CEO Michael Capellas met with some of the foundation’s 12-member board, arguing that the deal would help the companies compete against IBM, which sells more high-end computers and gets more money from high-profit business services.
They also said their combined power in retail stores would help offset the cost advantages of rivals Dell and Gateway, which mainly sell directly to businesses and consumers.
But the foundation didn’t agree with that assessment.
“After thorough study and analysis, the board has preliminarily decided, on balance, that the best interests of the foundation would be better served by Hewlett-Packard not proceeding,” said foundation Chairman Susan Packard Orr, a daughter of David Packard.
The Packard foundation didn’t say why it rejected the CEOs’ reasoning, nor did it provide a breakdown of Friday’s vote. But other shareholders, including other heirs of the company’s two founders, said the deal would dilute HP’s profitable printer business, create too much overlap in personal computers and create a conflict of cultures.
The vote left one of the largest proposed technology industry combinations. “to put it kindly, on life support,” said Lehman Bros. analyst Dan Niles.
In order for the deal to be approved, more than half of HP’s voting shares must back it. About 60% or 70% of HP’s shares might be voted, and about 19% of the stock is already on record against the takeover, Niles said. That means HP will lose if the rest splits evenly. HP declined to identify supportive shareholders.
Kumar, the Piper Jaffray analyst, said HP should give up and pay Compaq the $675-million breakup fee.
HP and Compaq officials have acknowledged that the combination would be difficult, especially because HP already has been undergoing a vast restructuring during the two-year tenure of Fiorina, the first CEO hired from outside the company’s ranks.
Fiorina has lost credibility on Wall Street and with some of her own employees by missing her profit forecasts, embarking on a complex internal reshuffling and trying to buy consulting firm PricewaterhouseCoopers. Fiorina abandoned that $18-billion acquisition under pressure from shareholders.
“It would be in the best interests of shareholders for her to move on,” Kumar said. “This was a last straw, and it will become her epitaph.”
Before the Packard trustees voted Friday, officials said their primary motivation was preserving the foundation’s net worth, more than half of which is tied up in HP stock.
“We’re long-term shareholders, and we have to think about what’s in the long-term interests of the foundation,” Chief Financial Officer George Vera said.
To a lesser extent, officials said, they were concerned about the human costs of the 15,000 jobs that are expected to be eliminated if the transaction is completed.
Three of the foundation’s members are children of founder David Packard. Two of their spouses also are on the board, as are former HP CEO Lew Platt and former HP Chief Operating Officer Dean Morton. The foundation did release the results of the vote. At HP, Platt had recruited Fiorina as his successor.
David W. Packard, Susan Orr’s brother, has spoken out against the merger, as has founder William Hewlett’s son Walter, who remains an HP director.
David Packard, a former director of the company, said last month that “for some time, I have been skeptical about management’s confidence that it can aggressively reinvent HP culture overnight . . . While change is necessary and inevitable, it does not follow that every innovation is an improvement.”
Wall Street has been betting for more than a week that the merger will collapse. HP shares have risen as a result.
“All signals have been negative for this transaction,” Walter Hewlett said after the foundation vote. “In the week following the announcement, stockholder value declined billions of dollars.”
In after-hours trading, HP stock was up $1.62 to $25.14 after closing in regular New York Stock Exchange trading at 23.52. Compaq was down $1.31 to $10.01 in after-hours trading after closing in regular trading at $11.32, also on the NYSE.
Niles predicted that when an eventual shareholder vote is called, HP will lose, and Fiorina and chief financial officer Bob Wayman will go on to other jobs, he said.
