HP-Compaq merger gets endorsement

Posted 9:23AM on Wednesday 6th March 2002 ( 23 years ago )

SAN JOSE, CALIFORNIA - With a historic shareholder vote two weeks away, Hewlett-Packard Co. got a crucial endorsement for its $22 billion acquisition of Compaq Computer Corp., increasing the companies' chances of completing the biggest merger in high-tech history. After reviewing piles of documents and hearing personal appeals from HP executives and merger opponent Walter Hewlett, Institutional Shareholder Services said Tuesday the deal could be an excellent long-term move despite its sizable risks. HP chairwoman and chief executive Carly Fiorina said she was gratified by the ISS recommendation, but said it doesn't ``seal the deal.'' She declined to predict the March 19 vote. ``We think this is a significant vote of confidence,'' she told reporters. ``The momentum is clearly moving in our favor.'' Walter Hewlett blasted the report, saying ISS ``missed the point.'' In a statement, Hewlett said he still expects to win the proxy fight because many investors independently evaluating the deal agree with his arguments. Analysts had said a positive report from ISS would leave HP with a 50-50 chance of winning the proxy fight, while a negative one widely would have been seen as fatal for the deal. That is because more than 20 percent of HP shares, including those held by the Hewlett and Packard families and their foundations, are lined up against the acquisition, with only about 5 percent of the shares in the company's camp. Some analysts and HP's chief financial officer have estimated that as many as 40 percent of HP shares will be in some way influenced by the report. Other analysts put the total much lower, because this deal is so vigorously contested that most money managers will weigh a variety of factors in deciding how to vote. Fiorina declined to speculate on what percentage of shares will be affected. At a minimum, ISS could control about 10 percent of HP shares because some investors have ISS vote for them. Barclays Global Investors - which owns 3.1 percent of HP stock and is the company's fourth-largest investor, has put its votes in ISS's hands because Barclays chief Patricia Dunn sits on HP's board. The report, released after the close of trading on the New York Stock Exchange, sent HP shares down 2.7 percent to $20.05 in the extended session. Compaq shares rose 5 percent to $11.12 in after-hours trading. A narrowing in the gap in the companies' stock prices indicates increasing confidence on Wall Street the deal will happen. With HP and Walter Hewlett locked for months in a bruising, political-style campaign for shareholder support, the ISS vote loomed much like a primary election. The campaign is expected to only intensify as the shareholder vote gets closer. ``ISS clearly has a predisposition to support management and makes a general presumption that boards do the right thing,'' Hewlett said in his statement. ``In the post-Enron world, it is obvious that these assumptions need to be questioned. This is especially the case here.'' Compaq's chairman and chief executive, Michael Capellas, who would become No. 2 at HP, said the ISS recommendation marked ``an important milestone in the merger process.'' The next big step before the vote would be approval from U.S. antitrust regulators, whose verdict is expected any day now, Fiorina said. Palo Alto-based HP and Houston-based Compaq believe that together they will become a dominant force in several technology markets, especially corporate computing and high-tech services, while improving the economics of their struggling personal computer divisions and generating $2.5 billion in cost savings. Hewlett and other merger opponents worry that absorbing Compaq into HP would be a difficult and distracting process, and that Compaq would dramatically increase HP's exposure to the slumping PC business at the expense of the profitable printing and digital imaging division. The ISS report, written by Ram Kumar, assistant director of U.S. research for the Rockville, Md.-based firm, closely examined both sides' arguments and the corporate governance process involved in planning the deal. ISS also consulted with HP's bankers, Hewlett's advisers and Fiorina's predecessor, Lew Platt, who opposes the deal. Although ISS said it agreed that integrating Compaq's and HP's massive organizations will be daunting, it concluded the companies appear up to the task. This is ``one of the most exhaustively planned combinations ever,'' ISS said. ISS also supported the HP board's contention that it had considered a slew of other strategic options before deciding that buying Compaq was the best course. Hewlett has challenged that notion and offered a simpler, ``focus and execute'' strategy centered more on the printing business. ``We believe that the Compaq merger provides a better means of maximizing long-term value by exploiting all of HP's assets rather than just a single `crown jewel,''' ISS said. ISS did agree with Hewlett, however, that the company should have disclosed the lavish pay packages that have been considered for Fiorina and Capellas. ISS said the issue indicates HP needs Hewlett or some other ``significant shareholder representative'' on its board. ``Whatever one's assessment of the merger,'' ISS said, ``it is clear that many boardrooms across the country could benefit from the kind of sincere, courageous independence that Mr. Hewlett has displayed in his willingness to contest management.''

http://accesswdun.com/article/2002/3/197884