Compaq, HP Holders Could Veto Merger
Shareholders of Hewlett-Packard Co. and takeover target Compaq Computer Corp. are so displeased with the planned acquisition that they might take the extreme step of rejecting the deal, investors and observers said Wednesday.
Shares of both companies fell Wednesday for the second day since the deal was announced, with HP declining 66 cents to a five-year low of $18.21 and Compaq dropping 67 cents to $10.41, both on the New York Stock Exchange.
HP has lost 22% of its value since Monday, when it said it would buy rival computer maker Compaq for $25 billion in HP stock. Compaq’s shares are down more than 16%. The proposed deal now is worth less than $20 billion.
“Most people who are against the deal are voting with their feet” by selling their shares, said HP investor Thomas Rath of Safeco Asset Management Co. in Seattle. “We don’t like what it does to the business mix.”
Compaq’s PC business is unprofitable, and the company is losing ground to market leader Dell Computer Corp. Analysts also complain that it could take two years of cost cutting and reorganization before HP shows any benefit from the deal.
The HP-Compaq deal does not have a minimum price, or “collar,” that allows either party to walk away if the shares continue to fall. The terms call for each Compaq share to be exchanged for 0.6325 share of HP.
If either company changes its mind about the merger, it must pay the other $675 million.
“There is an outside possibility that unless both companies are able to articulate the story better and convince the investment community,” a majority of shares will be voted against the transaction, said Chief Investment Officer David Katz of Matrix Asset Advisors in New York. Matrix owns 960,000 Compaq shares and 444,000 HP shares and opposes the deal.
“These kinds of acquisitions historically do not benefit shareholders, and the track record shows that,” said proxy specialist Richard Ferlauto of Institutional Shareholder Services, which advises investors. “We’ll take a close look at it. Wall Street’s reaction is very interesting.”
Even when shareholders don’t like the terms of an acquisition, they usually will vote to approve it, especially when no other deal is on the table.
However, five years ago, Kansas City Power & Light Co. shareholders rejected the company’s plan for a friendly merger with UtiliCorp United Inc.
And last year, Crown Central Petroleum Corp. shareholders rejected a proposed takeover by Rosemore Inc., though a higher offer was in the wings.
A drop in an acquirer’s stock price after a planned merger’s announcement may be partially due to disagreements about the deal’s benefits. The rest of the decline may be due to investors concluding that the prospects for each company are more severe that they thought, said Stanford University law professor Joseph Grundfest.
If a takeover does fall apart, typically only the first phase of the stock price decline is reversible, Grundfest said.
In any case, a continuing decline in market value can be too big for an acquiring company’s management to ignore.
That happened last year when HP was in talks to acquire the consulting business of PricewaterhouseCoopers for more than $17 billion. HP shares sank so much on news of the discussions that HP walked away.
Shareholders who oppose the HP-Compaq deal, however, have a bigger hill to climb because both boards of directors have signed off on it.
“They signed a legal agreement. It’s not like a date,” said Bear Stearns analyst Andrew Neff. He said a proxy vote to stop the takeover was possible but unlikely, in part because the shareholder vote comes so late in the process.
The two companies hope to close the deal in the first half of next year. By then, investors may view the unpopular merger as their last and best hope.
HP Chief Executive Carly Fiorina spoke at an investor conference in Boston on Wednesday and will continue making the rounds to shore up support for the Compaq purchase. “These companies fit like a zipper,” Fiorina said at the conference. “This combination is clearly a creator of share-owner value.”
HP Vice President of Corporate Strategy John Brennan said the amount of the stock drop was slightly more than HP had expected. “People react to the size of the deal . . . and the execution challenges,” he said. “We don’t anticipate that in the next couple months life is going to be easy,” he said. But in the end, “the compelling nature of the economics will become more apparent.”
Merger expert Bernard Black of Stanford said if HP’s and Compaq’s shares continue to sink, the deal could be killed by shareholders of either company.
“There’s a significant risk of that outcome,” Black said.
Even if the investors are mainly short-term holders, they may think the shares will go up more if the deal collapses, and thus they may vote accordingly, Black said.
