Hewlett Says Shareholders Oppose Compaq Merger

The debate over Hewlett-Packard Co.’s proposed acquisition of rival Compaq Computer Corp. intensified Thursday after dissident HP director Walter Hewlett said more shareholders opposed the transaction.

The son of HP co-founder William Hewlett told both companies’ boards that if they continue to push for a shareholder vote next year, “there will be serious and increasing adverse consequences.”

Citing private conversations with shareholders and analysts who haven’t criticized the merger publicly, Hewlett wrote that discontent with the plan is deeper than the boards know.

“Value is being lost here by both companies with each day that passes,” he wrote in the letter filed with the Securities and Exchange Commission. “The handwriting is on the wall.” HP shares fell 74 cents to $21.07, and Compaq dropped 40 cents to $9.39, both on the New York Stock Exchange.

Both boards fired back with their own letters.

“HP takes major exception to Walter Hewlett’s memo and its characterization of the reaction to the merger in the investor community and by HP employees and customers,” HP wrote.

The company also released a series of positive comments about the deal from individual HP directors, some of whom hadn’t spoken out before.

“What this merger really does is allow complementary product lines to come together,” said director Phil Condit, chief executive of Boeing Co. “Where there is a weakness in the HP line, it is filled.”

And stepping up his criticism of Walter Hewlett’s “ill-advised” impending proxy fight for shareholder votes, HP director and former chairman Richard Hackborn resigned from Hewlett’s foundation.

Hewlett, his foundation, the heirs of HP co-founder Dave Packard and the Packard Foundation have said they will vote against the $25-billion acquisition. Together they wield an 18% stake in HP, and many Wall Street analysts think the company has a slim chance of winning a majority vote.

Also Thursday, one analyst released a summary of his survey of customers of Compaq’s expensive Alpha servers, which found that 90% of the buyers would consider alternative vendors if HP follows through on plans to move them to HP machines after the merger.

“The overwhelming response is dissatisfaction,” wrote UBS Warburg analyst Don Young. “We are most concerned with revenue losses in the combined server operations.”

Young said the HP/Compaq deal is a bad bet for HP because cost savings will be offset by sales declines. That’s the same thing that happened after other big technology mergers, he said.

An HP spokeswoman referred questions about Young’s report to Compaq spokesman Arch Currid, who said some of Young’s assumptions and conclusions “are off the mark.”

He said Compaq understood that Young’s research was based on an unrepresentative sample of just 11 Alpha server buyers, out of thousands of customers.

Young couldn’t be reached immediately to confirm or dispute that figure.