HP/COMPAQ: All over but the counting

The proposed US$20 billion merger of Hewlett-Packard and Compaq Computer appears to be in the same legal limbo that the Bush-Gore election experienced in November 2000.

Unlike the presidential race, nobody got snippy, but a few testy moments ensued at the overflowing HP shareholders meeting here Tuesday morning. Just an hour after the meeting ended, HP Chief Executive Officer (CEO) Carly Fiorina declared a "slim but sufficient" margin favoring the merger based on preliminary estimates by the proxy solicitor. She would not say how many votes independent firm IVS Associates Inc. had counted.

Merger opponent Walter Hewlett, however, declared it "impossible to determine the outcome at this time," and said he expects a "razor-thin margin" when IVS completes the ballot count. In fact, the outcome will not be certain for several weeks.

At the meeting, Fiorina fielded questions for more than an hour while shareholders had their last chance to cast or change their ballots. Perhaps 100 attendees requested ballots on site, although there is no way to tell how many shares those last-minute voters represent. Most had already voted using one of the roughly one dozen proxies mailed to every shareholder in the weeks before the meeting.

Those early ballots are the ones that led Fiorina to declare an early victory. However, since shareholders received numerous invitations to file a proxy, they could change their votes until the meeting, so it's the last ballot cast that counts. HP has 1.949 billion shares outstanding; the merger requires a simple majority for approval.

The HP heirs and their foundations, which oppose the merger, account for approximately 18 percent of the stock. Compaq shareholders, scheduled to meet on Wednesday, are expected to approve the merger. The plan has already received Federal Trade Commission approval.

Counting assets

Earnest and sometimes emotional discussion marked the shareholders meeting, which drew approximately 1400 attendees. They entered through metal detectors and security stripped everyone of recording devices and, ironically, PCs. Many of those present were retirees still living in the area; some were employees, and many were attending at the behest of colleagues who demanded a full report.

The first speaker was board member Hewlett, who repeated his concern that the proposed merger is unnecessary and possibly detrimental. "The very public, very spirited debate over this merger has also been a debate about the soul of HP, and what it means for America," Hewlett said. "The HP Way is not a relic of another time, and it's not a piece of trivia relevant only to Hewlett and Packard family members," he added, referring to the founders' book about their business philosophy. Hewlett received a standing ovation from shareholders, and Fiorina joined in the applause.

Fiorina offered no rebuttal, but when answering questions reiterated the basic case that the corporation has made for the past five months. She contends HP would plug holes in its product line, building several strong business units.

She particularly cited Compaq's leading NT server business, fault-tolerant computing unit, and storage business (largely a product of Compaq's own acquisition of Tandem). She favors Compaq's headway in the Linux market to HP's slowing Unix sales. The company could merge consulting services and PC product divisions, she said, declining to give specifics except to point to Compaq's direct distribution.

Asked what HP will do if the merger vote fails, Fiorina said the board will "go back and look at alternatives." HP has other options, she said, but the board considered the merger the best choice. Throughout Fiorina's remarks, the audience was subdued but polite.

Worries and wisdom

The CEO also bantered amicably with shareholders, pointedly thanking those who identified themselves as owners of HP PCs. Among the comments:

* One man, who identified himself as a 22-year HP employee, voiced disapproval of the way the company handled recent layoffs, and noted his fear of a similar approach under a merger. "I oppose this merger and I don't have trust for the team planning it," he said. "If it goes through, I can tell you I will not be an employee of this company for much longer, and I regret that." He was met with 30 seconds of whooping and hollering support.

* A French shareholder, speaking on the behalf of an estimated 40,000 European employees, urged Fiorina to guarantee continued employment. She declined, noting that "this merger does not represent the only situation in which positions must be eliminated." HP estimates the merger will bring 15,000 layoffs between the companies. Fiorina said layoffs would "always be the last resort" but added, "profit has always been the primary objective. It is the foundation for everything else a company can do."

* Carl Davidson, another HP employee who called himself an alumnus of HP's rocky acquisition of the Apollo workstation firm in 1989, wanted assurance of a smoother transition, especially financially. "I wasn't here, but I heard it didn't go so well," Fiorina said. "That's an understatement," Davidson shot back.

However, Fiorina repeatedly noted that Compaq and HP have 900 employees working full-time on transition strategy, so the companies can act quickly if stockholders approve the merger. "We have more than 500,000 hours of integration planning under our belt," she said, eliciting a long, low whistle from the audience. "We would not undertake this merger without understanding in depth what it takes, and we are prepared."

Adversaries amicably disagree

Though they hold opposing views on this major corporate issue, apparently both Fiorina and Hewlett recognize the other's good intentions. Both also noted that a proxy fight, while painful, is a healthy shareholder exercise. They both commented that the exchange of ideas and information is valuable, although Fiorina derided the distribution of what she called "disinformation."

Pressed as to whether she would support Walter Hewlett for a board position again, Fiorina (and later Hewlett) pointed out that the decision is the call of the corporation's nominating committee. Hewlett said he is interested in continuing to serve on the board.

"When the ground has cooled, I hope we can put the rancor of this fight aside and work together," Fiorina said. "To the Hewlett and Packard families, I say this company will always be proud to bear your name and we will always work to make you proud."

Hewlett, speaking after the meeting, said he felt "like I really did accomplish something," and he remains optimistic the merger will be defeated. Although he is a longtime board member of both HP and its Agilent spinoff, he described his recent immersion in corporate activity as "an alternate universe."

"I never took anything in this campaign personally," Hewlett said. "The only thing I've taken personally is the drop in the stock price," he added ruefully, to appreciative laughter.

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