HP Wins Key Support in Merger Fight
Hewlett-Packard Co. on Tuesday scored the biggest victory so far in its hard-fought campaign to take over Compaq Computer Corp., winning the endorsement of an influential advisor to big investors.
Institutional Shareholder Services said the $22-billion merger was a better bet than a plan by dissident HP director Walter Hewlett for the company to go it alone and reinvest in its profitable printing business.
“We believe that the Compaq merger provides a better means of maximizing long-term value by exploiting the potential of all of HP’s assets, rather than just a single crown jewel,” ISS said.
With about 20% of HP shares committed to opposing the deal and a much smaller number publicly in favor, opposition by ISS could have left the merger’s prospects all but dead. Now, HP’s management may have a slight edge ahead of a March 19 vote.
“It’s going to be very close. We’re going to be down to examining the chads,” said J.P. Morgan analyst Daniel Kunstler. He said he expected ISS to endorse the merger, but was surprised how unequivocal the endorsement was.
Hewlett and David Packard, both sons of the iconic Silicon Valley company’s founders, have led fierce opposition to the combination. They say that HP, which is losing money in the computer business, shouldn’t tie itself to a rival even more deeply involved in personal computers.
HP contends that adding Compaq will give it a dominant position in multiple markets, vastly increase HP’s small services arm and allow it to compete better in the big-computer arena against IBM Corp. and Sun Microsystems Inc.
ISS analysts met repeatedly with Hewlett, HP Chief Executive Carly Fiorina and others involved in the costly and contentious proxy fight during the last few months. About 23% of HP shares are held by ISS clients, some of whom automatically follow the firm’s recommendations.
Of the HP investors that are ISS clients, Barclays Bank is the largest, with more than 3% of shares. Barclays had committed to voting as ISS recommended because its CEO sits on the HP board and recused herself from voting on the issue.
About 10% of HP shares are estimated to be in the hands of index funds, which typically follow ISS’ lead. The remainder will weigh Tuesday’s report but could come to different conclusions.
Compaq shares fell 7 cents to $10.58 on the New York Stock Exchange in regular trading, then rose to $11.20 in after-hours trading after the ISS news. HP shares rose 5 cents to $20.60 in regular NYSE trading and fell to $20.12 after hours.
In the report, ISS said HP’s projected cost savings of $2.5 billion a year were achievable. And it picked the company’s projection of a 4.9% loss in sales over Hewlett’s estimate of triple that amount.
“ISS concludes that management offers a reasonable prediction about what the future may hold,” the report said.
ISS said it was satisfied that HP’s work had been thorough and that the company’s board had been actively involved in weighing the Compaq plan and alternatives.
The deciding factor for ISS may have been the amount of effort HP and Compaq already have invested in planning the implementation of the merger.
More than a half-million hours have been spent by managers plotting the integration of products and employee teams, making HP-Compaq “one of the most exhaustively planned combinations ever,” ISS said.
“We’re pleased that ISS, who is a truly independent expert, recognizes that this merger serves the best interests of our shareholders,” Fiorina said. “We think this is a significant vote of confidence.”
Hewlett said he disagreed with the ISS decision and observed that the Maryland firm is better known for its handling of corporate governance issues.
“ISS clearly has a predisposition to support management and makes a general presumption that boards do the right thing,” Hewlett said.
ISS took both sides to task for some of the high-pitched and personalized rhetoric of the last few weeks in mailings to shareholders, news releases and full-page ads.
In one recent spat, Hewlett released board committee meeting minutes and a letter from HP’s counsel to Compaq’s, showing that the companies had contemplated giving Fiorina options valued at more than $50 million. The agreement wasn’t finalized, but ISS agreed with Hewlett that it should have been disclosed.
HP bears the brunt of the blame for the nastiness, ISS said. And Hewlett’s arguments about the inherent risks of technology mergers and the difficulty of competing in markets for PCs and low-end computer servers probably forced HP to do such diligent work on planning the merger’s details.
“Many boardrooms across the country could benefit from the kind of sincere, courageous independence that Mr. Hewlett has displayed,” the analysts wrote.
Be that as it may, with the contest in a dead heat and only two weeks to go, few expect the tone of the debate to grow more refined.
“I’d be surprised,” said Merrill Lynch analyst Steve Milunovich. “In political campaigns, the bickering tends to get dirtier the closer you get to the end.”
