Hewlett family to vote against Compaq merger

In a potentially devastating blow to Hewlett-Packard's (HP) plans to acquire Compaq, the family of the late co-founder Bill Hewlett has vowed to vote against the merger when shareholders are asked to approve the $ 21 billion merger. The announcement could set in motion a wave of further opposition among major HP shareholders and board members that could eventually torpedo the deal, and with it the leadership of Carly Fiorina, Chairman and CEO, HP.

Although the Hewlett family controls only five percent of HP's stock, the opposition of one of the two founding families carries a huge amount of weight. In a further expression of its lack of confidence in either the merger or Fiorina, Walter Hewlett, the oldest son of Bill Hewlett has been selling huge blocks of HP stocks in recent months, some 229 million shares in all. Hewlett is one of the directors of HP's board and his opposition signals a rift in the board's support for both the deal and Fiorina's controversial leadership.

Hewlett was blunt in defending his family's decision to oppose the merger. "I am absolutely certain that Compaq is not the right partner for HP. Given the lack of stockholder benefits, I believe the extensive integration risks associated with this transaction are not worth taking."

Compaq, Hewlett explained, has too much exposure in PCs, lower-priced servers and in support services. He believes HP is better served concentrating on high-end servers and outsourcing and consulting. "The merger would distract HP management and the rest of the HP employees from concentrating on areas in which HP excels and should be expanding. The uncertainty created by the merger could cause existing and potential customers to delay orders or to purchase products from HP's competitors."

The move is putting enormous pressure on the Packard family to make a decision whether to support Fiorina and the Compaq merger. The Packard family controls about 10 percent of HP's stock. So far, the family's foundation, one of the world's largest charitable organizations, has not made a decision and has hired consultants to assist in the decision.

So far, the two families have not been in contact with each other on the issue of their support for the deal. "It has tremendous consequences for us," said Robert Stephens, a son-in-law of HP co-founder David Packard and a member of the Packard foundation's board.

Initially, Hewlett said, he had voted with the majority of the board in favor of the acquisition. It is not clear how many HP board member have since also changed their position. Certainly the merger has been slammed on Wall Street and HP's stock has remained depressed at around the $ 18 level. News of the opposition of the merger at the board level sent HP shares soaring 17 percent to nearly $ 20 while Compaq shares fell 5.5 percent to $ 8.50.

Wall Street opponents of the HP-Compaq merger used the Hewlett announcement to voice their opposition. "We were absolutely very pleased by today's announcement. We think it opens the door for other board members and large shareholders that have questioned this transaction to come forward," said David Katz, President, Matrix Asset Advisors, which has holdings in HP and Compaq stock.

HP kept a stiff upper lip. "While we regret very much the Hewlett family's decision, we are not surprised. The HP board of directors and HP and Compaq remain fully committed to the merger and expect shareholder approval," HP said in a formal statement.

Industry analysts were quick to conclude that while the Hewlett family's decision is not the straw to break the camel's back, it may well set in motion a series of events that will lead to a cancellation of the merger and the almost inevitable ouster of Fiorina. "I think symbolically, it's a blow to the deal and to the confidence of industry observers and other shareholders, many of whom take their cue from that pretty big Hewlett stake," said Eric Rocco, VP, Dataquest.

Fiorina has been under a barrage of criticism since she first announced plans to acquire the consulting unit of the PriceWaterhouse Coopers firm. The negative reaction on Wall Street to that deal set in motion a steady decline in HP stock which traded above $ 60 at the time of the first merger announcement in September 2000.

Subsequent poor financial results, combined with ill-advised projections of strong sales growth for fiscal 2001 and a weakening economy caused the stock to fall to around $ 30. The merger with Compaq dealt an even more devastating blow to HP and sent its shares tumbling to less than $ 20. And the company is in danger of suffering its first quarterly loss since the company was founded in 1938.