Compaq May Push HP to Assess Merger Backing
Concerned about wasting more resources on a losing fight, Compaq Computer Corp. soon may press Hewlett-Packard Co. for a deeper analysis of the odds of its shareholders’ approving the merger of the two companies.
“It would certainly make sense to do so,” Compaq director Tom Perkins said Tuesday. “The uncertainty is not good for anyone.”
If HP isn’t sure it can muster the votes, Compaq may press the Silicon Valley titan to give up, with neither side having to pay the $675-million breakup fee.
Compaq executives already are preparing for that possibility by making a more public case that the company would be fine without HP.
To support HP’s campaign for shareholder votes, “the best thing we can do is to keep improving Compaq, continue to gain market share, and improve our profitability,” Perkins said.
“That’s also Plan B: That’s what we should be doing anyway.” He said Compaq is unlikely to try to alter the terms of the deal to revive its chances of success.
In a memo to employees over the weekend, Compaq Chief Executive Michael Capellas went further than HP has in acknowledging that shareholder opposition could kill the $25-billion deal.
“We went into this merger with three very clear objectives: extend our enterprise capabilities across products, software and solutions; achieve critical mass in our global services business; and improve the economics of our PC business,” Capellas wrote in an e-mail.
“Whether we are part of the new HP or a stand-alone company, I am confident in our ability to achieve these objectives.”
HP Chief Executive Carly Fiorina also called on employees to produce solid financial results this quarter, saying a strong performance “will silence some of our critics while we redouble our efforts to communicate the benefits of the merger.”
In a memo to employees Tuesday, Fiorina called the founding families’ position a “disappointment” but said that it came in the early rounds of what will be a long fight.
“No one ever achieved greatness by giving up when the critics on the sidelines voice their concerns,” she wrote. “Rest assured that we do not intend to give up, and we will continue our efforts to return this company to greatness.”
Compaq shares fell 21 cents, to $9.49, in New York Stock Exchange trading Monday. HP shares dropped $1.01, to $21.99, also on the NYSE.
Compaq’s Perkins said the Houston-based computer maker remains committed to the merger, even after the heirs of HP founders and foundations they are affiliated with pledged to vote 18% of HP’s stock against the deal.
But Compaq has more to lose from a prolonged battle that doesn’t succeed, industry experts said. And unlike Fiorina, Capellas hasn’t staked his career on the outcome of the merger fight.
“Capellas may be a lot of things, but he isn’t stupid,” said technology consultant Terry Shannon, author of the newsletter Shannon Knows Compaq. “Compaq cannot afford to spend three months or six months in an extended period of introspection.”
Already, some customers have shied away from Compaq out of concern for disruption at the firm and uncertainty about which product lines and key employees will remain.
Gartner Group Inc., a prominent consulting firm, added fuel to that fire Tuesday when it told clients to avoid buying some large-scale equipment, including Compaq’s top-of-the-line servers, from either Compaq or HP until the dust settles.
The comments by Compaq officials address outside concerns about its prospects as an independent company, a perception that varies widely from one analyst to another.
At U.S. Bancorp Piper Jaffray, analyst Ashok Kumar said those prospects are “dubious” and projected per-share earnings of only 10 cents in 2002, down from $1.10 in the year 2000.
Shannon, on the other hand, believes the company could do well if it steps up its marketing, rethinks its commitment to consumer desktop machines and keeps tying service contracts to its sales of big computers.
“They make money on storage, they make a lot of money on services, and they have good enterprise-class equipment,” Shannon said. “It’s PCs that are their Achilles’ heel.”
Perkins, who was a longtime Hewlett-Packard computer executive, said Compaq is doing many things right, including shifting 65% of its computer sales to direct distribution, gaining a better footing against Dell Computer Corp., which saves money by selling directly to customers.
