HP/COMPAQ: Analysis: Pondering the effects of a merger

As Tuesday's vote on the proposed merger between Hewlett-Packard and Compaq draws near, experts continue to ponder the possible consequences of either a "yea" or "nay" vote on the largest technology coupling in history.

If shareholders vote against the mega-merger, it will likely spell goodbye for HP's current chairperson and CEO Carleton S. (Carly) Fiorina, and send HP into a state of working chaos that could last as long as two years, according to Paul McGuckin, vice president of research at Gartner Inc., in Stamford, Conn.

"Carly goes quickly, and probably of her own will," said McGuckin, describing the events that would likely follow the merger being voted down. "With a second aborted merger on her watch -- the first being PricewaterhouseCoopers -- Carly might interpret this as a vote of no confidence by the shareholders. My guess is that she would leave, and there would be a number of board members that would leave as well."

At that point, Walter B. Hewlett, a dissenting voice during the time leading up to the merger vote, might possibly launch a campaign to replace Fiorina with a candidate of his choice, McGuckin suggested.

But despite efforts by HP officials to keep the company running smoothly following the voting down of the merger, an air of confusion will likely hang over HP for some 12 months to 24 months. The damage to HP's image as a company, and to the morale of its employees, will be so severe that McGuckin thinks the company could very well miss out on getting its fair share of an upswing in technology purchases that Gartner expects later this year.

"Certainly HP's image as a company suffers long-term damage," McGuckin said of a possible negative outcome to the merger vote. "There is a severe tarnishing of HP's image, of the HP way, and of the morale of HP employees. It will not be easy for them to recover from."

Compaq shareholders vote on the merger the day after HP shareholders cast their final ballets. McGuckin said Compaq shareholders are all likely to vote for the HP/Compaq merger, meaning official word of the merger's acceptance would come as early as Wednesday.

If the merger is voted through with a clear, uncontestable margin, the final deal would be consummated in early April, McGuckin said.

Immediately after that, the A-list of HP's and Compaq's customers would be quickly notified as to who their account team was, and those account teams would be responsible for communicating product road maps and other plans for the new, combined HP/Compaq.

"Then they would be promptly [get] ready to send out a lot of layoff notices to many thousands of employees," McGuckin said.

When the merger was announced in September 2001, HP and Compaq officials said at least 15,000 jobs would be lost as a result of the completed deal.

As for HP's ability to make a merger the size of the HP/Compaq deal work, McGuckin said Fiorina and her associates at HP and Compaq have brushed up on the lessons of past merger efforts, such as Compaq's acquisition of Digital Equipment Corp., and HP's recent acquisition of Bluestone Software Inc.

"If anybody can make this merger work, this team can," he said.

A third and even more bizarre scenario would be if the merger vote were too close to call.

Shareholders typically receive multiple voting, or proxy, forms prior to a vote such as the HP/Compaq merger. Shareholders can send all of their proxy cards in, even voting different ways on each card, because by the rules, only the last proxy card submitted by a shareholder is counted. In a merger vote is too close to call, all proxy cards would have to be inspected to determine which were the last ones sent in and which were earlier votes that don't count. This would cause additional weeks of delays, and possibly prompt Walter B. Hewlett to file suit in an effort to halt any close vote from being called a win for the merger, McGuckin explained.

HP shareholders are scheduled to vote on the merger Tuesday, during a special shareholder's meeting at HP's corporate headquarters in Cupertino, Calif.

Publicly announced back in September 2001, the proposed merger and the ensuing six-month wait for Tuesday's vote has had a disruptive effect on the industry. During that time, competitors of HP and Compaq nearly all said publicly that they would capitalize on any customer confusion created by the merger. In-fighting within the Hewlett family and between HP shareholders over whether or not to support the merger have compounded concerns over the outcome of the deal.

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