HP’s Risky Gamble to Gain Deal’s Support
Plowing ahead with its endangered bid to buy rival Compaq Computer Corp., Hewlett-Packard Co. is preparing a series of politically risky arguments to convince employee shareholders and institutional investors to back the deal.
The intensified campaign will raise questions about the wisdom of the heirs of the company’s founders, Silicon Valley legends who are revered by many HP workers.
Critics said the strategy is a sign of desperation after HP’s largest shareholder, the nonprofit David and Lucile Packard Foundation, said Friday it intended to oppose the acquisition. Many then gave the $25-billion deal slim chances of success, with analyst Ashok Kumar of U.S. Bancorp Piper Jaffray declaring the effort “dead as a dodo.”
But instead of taking some investors’ advice and walking away, HP Chief Executive Carly Fiorina has decided to spend more time selling the takeover to institutional investors and HP workers, many of whom have small HP holdings.
People familiar with the company’s thinking said Fiorina will pay special attention to Institutional Shareholder Services, which recommends to many big investors which way to vote.
“We look forward to having an opportunity to meet with ISS,” HP spokeswoman Rebecca Robboy said Sunday. “We believe the more the investment community, including ISS, knows about the merger and its benefits, the greater the likelihood that they will support it.”
Since many individual investors were watching to see what the Packard Foundation would decide to do with its 10.4% of HP stock, Fiorina must try to spell out why other shareholders should come to a different conclusion than the foundation.
Among other things, she will say or imply that the foundation is mainly concerned with preserving its assets, about 85% of which is in shares of HP and Agilent Technologies Inc., HP’s scientific and measurement equipment spinoff.
Fiorina will argue that other investors can afford to tolerate more risk, since they have more diversified holdings.
More delicately, HP sources say, the company will try to show that the influence exerted against the merger by the heirs of legendary HP founders Bill Hewlett and Dave Packard shows why major shareholders should want to complete the Compaq acquisition.
More than 18% of HP stock is controlled by the children of the two men and groups associated with them, and all of that stock is now on record against the deal.
Fiorina will try to convey the idea that so much family control is a bad thing, especially for high-technology firms that must take risks to stay competitive.
If HP combines with Compaq, the families’ stake of the united firm would be diluted, along with their influence.
That argument is tailored for the proxy advisory group ISS, which in past recommendations has placed great emphasis on the quality of corporate governance. In previous endorsements, ISS has criticized firms that have too many insiders, founders or their relatives on their boards.
But the new tack is a risky one for Fiorina, since many HP employees regard the founders, whom they call “Bill and Dave,” as saints.
Workers described by HP executives as a “vocal fringe,” have been complaining about the merger, Fiorina’s restructuring of the company, and what they say is her imperious style.
Now more than ever, this group sees the Hewlett and Packard families as returning saviors, not meddlers.
Some backlash is likely if Fiorina pursues the point.
“The Packard Foundation has independent directors and hired outside advisors,” said one deal opponent who asked for anonymity. “Blaming it on the families goes totally against the market reaction.” HP shares dropped sharply when the Compaq deal was announced and have regained ground each time the merger seemed to get less likely.
ISS analyst Ram Kumar said the overly conservative foundation argument “is worth exploring.” But the contention that the families are too powerful “is a somewhat risky argument. We’ll see what they have to say on that point.”
It may hurt HP’s case that the foundations’ vote was unanimous against the deal, with five Packard family members joined by unaffiliated individuals, according to a foundation source.
In the meantime, HP will try to quell the brewing workplace rebellion by visiting more offices to make a more vigorous case for the Compaq deal, HP officials said.
And there are other reasons for spending more time courting the troops. If HP wins the eventual shareholder vote on the acquisition next year, it is likely to be by a whisker. For that reason, even the 2% of the company owned by employees and the 1% owned by retirees is worth fighting over.
HP executives say the combination makes sense because it would give the resulting company a commanding lead in the retail computer market. It also would give it a better shot at capturing more lucrative services contracts.
Deal opponents say the company should de-emphasize computers and develop better printing products, which are more profitable.
Fiorina has become a lightning rod for complaints about previous layoffs, missed earnings targets and her earlier, abandoned effort to buy the consulting arm of PricewaterhouseCoopers for $18 billion.
In recognition of that reality, HP is turning more to other executives and board members, including former board chairman and HP computer executive Richard Hackborn, to push the Compaq deal.
“We have to get a PC business that is profitable. We have to get our overhead cost structure in line,” Hackborn said last month in a video made available to employees. With the merger, “we’re going to have a much more leveraged organization that can afford to do the things we need to do.”
Fiorina has yet to decide how much emphasis to place on another, still more troubling line of argument: that without the deal, HP is in a predicament worse than people think.
