HP/COMPAQ: Fiorina deflects queries about a solo HP

With the shareholder vote on Hewlett-Packard's (HP) planned acquisition of Compaq Computer likely to be exceptionally close, a question on the minds of many is how HP will regroup if the deal is defeated. HP Chief Executive Officer (CEO) Carly Fiorina glossed over queries on that point during her afternoon question-and-answer session at HP's meeting here with securities analysts.

"I'm not going to speculate on what will or won't happen if this merger doesn't go through," Fiorina said, in response to a question about her commitment to remaining CEO of a stand-alone HP. "If this merger is voted down, we will go back and look at all of our alternatives again. They will be the same. They will have the same consequences, and none of them, in our judgment, are as good as this one."

Fiorina also shot down a follow-up question about potential damage to HP's culture and morale if the acquisition is rejected by shareholders. While HP has committed a "tremendous amount of energy" -- along with several hundred full-time employees and about 500,000 working hours -- to integration planning, more than 99 percent of its staff remains focused on day-to-day operations, Fiorina said.

The "what if it fails" question isn't purely theoretical: A common refrain among analysts at the meeting is that despite the HP leadership's bullish tone, the shareholder vote is likely to be hairsplittingly close. Several investment-banking analysts -- most of whom declined to comment for attribution -- said their primary interest in attending the meeting is to poll other attendees to develop a better sense of the deal's chances.

PNC Advisors, which is recommending that its clients to vote for the acquisition, is "over 50 percent confident" it will be approved by shareholders, said Bill Gorman, vice president of equity research. But not much over 50 percent: With roughly 20 percent of HP's shares committed to a vote against buying Compaq, "it'll be hard," Gorman said. "The real sore spot is that computer mergers don't work."

Sanford Bernstein & Co. LLC analyst Toni Sacconaghi -- a steadfast critic of the deal, and Fiorina's fiercest interrogator during the Q&A -- said he expects the acquisition's chances of passing to fluctuate daily. Citing the same figure as did Gorman, the deal's opposition by shareholders controlling one-fifth of the vote, he said he thinks the odds are stacked against its approval.

Today's meeting did little to change his dim view of the acquisition, Sacconaghi said.

"I was impressed at the level of time and commitment put into planning the merger," he said. "But I think to suggest that other companies haven't done the same would be a discredit to them."

One Compaq shareholder attending the meeting said he hopes the deal falls through. Delroy Warmington, managing director of boutique telecommunication investments hedge fund Delwar Capital Management LLC, said he has opposed the deal since its announcement, and that HP's comments at the meeting didn't change his mind. This acquisition is primarily a PC deal, one that will negatively affect both companies' businesses, he said.

The verdict of Institutional Shareholder Services Inc. (ISS), expected to issue its report on the merger within the next several days, will be critical, concurred many analysts at the meeting. ISS advises intuitional shareholders, which own 57 percent of HP's shares. Twenty-three percent of HP shareholders subscribe to ISS, said HP Chief Financial Officer Bob Wayman, who acknowledged that ISS' "very important" analysis will likely influence a significant percentage of voters.

HP's goal for Wednesday's meeting was to "insure that the substance associated with this merger came out … and to build (analysts') confidence that we understand that this is going to be a really big task," said HP Services President Ann Livermore. "We have much more done already than most people realize."

HP devoted seven hours and a half-dozen presentations to making that point. By the end of her hour-long afternoon Q&A session, Fiorina had nearly lost her voice.

Those considering the acquisition should ask themselves four questions, Fiorina emphasized in both her opening and closing remarks: Does this deal create market leadership? Will it generate improved performance and cash flow? Was it the result of a comprehensive process of corporate governance? Can HP's management team execute the union?

"This is not a game. This is not a sport. It is not a popularity contest. It is a serious decision that our shareowners, all our shareowners, need to make," Fiorina said. "Do we retreat into the past and surrender our future? Or do we choose to put all this energy and effort and commitment to work so that we can lead and grow?"

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