Compaq, HP Have a Lot to Lose in Battle
Hewlett-Packard Co. faced mounting shareholder opposition to its planned acquisition of Compaq Computer Corp. on Monday, as experts warned that the battle itself--regardless of the outcome--may seriously harm the struggling technology giants.
“They have not sold us on the idea of why” the merger would work, said David Katz, chief investment officer at Matrix Asset Advisors in New York, which owns nearly $20 million worth of the two companies’ stock. “There’s a tremendous amount of questions and uncertainties.”
Other big investors said the two companies should remain independent and restructure their operations rather than try to fix their shortcomings by bulking up.
“Both companies are probably better off just doing what they were doing as single, independent entities,” said Benjamin Easow, an analyst at Northern Trust Global Investments, which owns nearly $400 million worth of stock in the two companies.
The approval of institutional shareholders--pension funds, mutual funds and insurance companies--is critical to HP’s $25-billion buyout of Compaq. Institutions own 57% of HP, and the company will need most of those shares to complete the deal.
That’s because HP’s largest shareholder--the David and Lucile Packard Foundation, which owns 10.4% of HP shares--said Friday that it would vote against the merger. Combined with members of the Hewlett family, who earlier said they would oppose the acquisition, the heirs of the two late company founders control 18% of HP’s shares. Individuals own the remaining 25% of HP shares.
Since the two families announced their opposition, no institutional investor has publicly expressed approval of the deal. The Packard Foundation’s announcement intensified the pressure on shareholders to start choosing sides.
HP and Compaq officials declined to say Monday how they would argue their case to key shareholders.
But investors on Wall Street--already wary about the deal’s prospects--grew more skeptical. Compaq shares plunged $1.62, or more than 14%, to close at $9.70 on Monday, the first day of trading since the Packard Foundation took a stand. HP stock lost 52 cents, to $23. Both trade on the New York Stock Exchange.
Several other large institutional investors said Monday that they are keeping their options open; some declined to comment.
“A few days ago, we had the executive team [from Hewlett-Packard] in here to talk to us,” said Thomas M. Mistele, vice president of Dodge & Cox, which holds nearly 1% of HP shares. “We’re still researching the issue intensely.”
HP has yet to set a date for a shareholder vote, although company officials said Monday that it will not occur before late February.
Company spokeswoman Rebecca Robboy said that HP executives remain confident they will convince a majority of shareholders to support the merger.
“Because the Packard Foundation is a charitable institution, they must necessarily take a conservative, short-term approach,” she said. “While we respect their interests and understand their requirements, a high-tech company competing in a rapidly changing market has different requirements.”
Robboy denied that HP is experiencing a groundswell of opposition to the deal among its employees, who own an estimated 3% of the company’s shares.
Experts said a protracted public battle between HP and the offspring of its legendary founders would further weaken the company’s management team, led by Chief Executive Carly Fiorina. Employees and customers may begin to abandon HP if the merger’s uncertainty stretches into 2002.
A fight to the finish “really puts the shareholder interest in the back seat,” said Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray.
Katz of Matrix Advisors voiced concerns about integrating disparate work forces and about the time and effort required to secure antitrust approval.
The outcome of any shareholder vote will depend in part on the opinion of Institutional Shareholder Services, a consulting firm that investment companies hire to advise on mergers.
ISS will issue a recommendation on the HP-Compaq deal about three weeks before the shareholder vote, said Patrick McGurn, an ISS vice president. “I’m sure [HP is] searching for somebody--anybody--who will come out and publicly support the deal, given they’ve had this hailstorm of people coming out with announcements of opposition,” McGurn said.
Compaq’s leaders may face similar pressures. The Houston-based PC maker “is already seeing a major hemorrhage of their customer base across their product line,” Kumar said.
HP’s management would abandon the merger plan at their peril--in part because HP would have to pay Compaq $675 million for breaking the deal before a shareholder vote. But the longer the uncertainty continues, the harder it may be to complete the merger.
“They are facing the prospect of a long-running [PC industry] decline,” said Fred Hickey, editor of the High Tech Strategist, a financial newsletter. “The longer the merger [battle] goes, the worse the industry conditions will be, and the harder it will be to sell” to investors.
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Times staff writer P.J. Huffstutter contributed to this report.
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Hewlett-Packard’s Largest Investors
More than 18% of Hewlett-Packard stock is controlled by the children of founders William Hewlett and David Packard, or groups associated with them. All of that stock is on record against the proposed $25-billion deal to acquire Compaq Computer.
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Total shares outstanding 1.94 billion shares Number Percent of shares of shares Shareholder (millions) outstanding David and Lucile Packard Foundation 201.3 10.4% Capital Research and Management 68.9 3.6 Barclays Bank 60.1 3.1 Bank of America 55.0 2.8 State Street 45.2 2.3 State Farm Mutual Automobile Insurance 41.5 2.1 Putnam Investment Management 33.7 1.7 William and Flora Hewlett Foundation 30.8 1.6 Vanguard Group 29.9 1.5 Davis Selected Advisers 28.0 1.4
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Source: Bloomberg News
