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HP-Compaq merger still on brink
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November 14, 2001: 2:55 p.m. ET
Packard Foundation to cast deciding vote on HP's takeover of Compaq.
By Staff Writer Luisa Beltran
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NEW YORK (CNN/Money) - Opposition from the David and Lucile Packard Foundation could deal a death blow to Hewlett-Packard Co.'s proposed $20 billion takeover of Compaq Computer Corp.
The Los Altos, Calif.-based Packard Foundation has yet to decide which way it will vote but many expect them to come in on the negative side. The foundation is conducting an independent analysis of the merger but the family will make the ultimate decision, a spokeswoman said.
The foundation, HP's biggest shareholder, owns a 10 percent stake, and three Packard family members sit on its board. Some expect the Packard Foundation to make its decision in January but no date has been set.
"We'll know when you know," a foundation spokeswoman said.
But Palo Alto, Calif.-based Hewlett-Packard seems to be riding out the rough economic waters. HP reported fourth-quarter results Wednesday that easily beat Wall Street forecasts. Income from continuing operations dropped 57 percent to $361 million, or 19 cents a share, from $841 million, or 41 cents a share, a year earlier. Earnings tracker First Call had expected 8 cents a share.
On a conference call, embattled CEO Carly Fiorina defended the company's plan to buy Houston-based Compaq, which she said will accelerate HP's overall strategy and strengthen its position in nearly every category it competes in, particularly the enterprise computing business.
HP and Compaq are only halfway through the merger process. "We remain convinced this merger will go through," she said.
The strong earnings buoyed shares of Hewlett-Packard (HWP: up $1.85 to $22.08, Research, Estimates), which surged more than 9 percent Wednesday while Compaq (CPQ: up $1.20 to $10.00, Research, Estimates) gained nearly 14 percent.
Founders' kids against merger
Some of the children of founders Walter Hewlett and David Packard have recently come out against the deal. Last week, David Woodly Packard indicated he would vote against the $20 billion merger. The announcement followed an earlier decision from Walter Hewlett, along with his sisters Eleanor Hewlett Gimon and Mary Hewlett Jaffe, to vote against the HP-Compaq merger if it is presented to shareholders. A revocable trust and the foundation in the Hewlett family's name will also oppose the deal.
The Hewlett descendants account for about 7 percent of HP shares outstanding and combined with the Packard Foundation's 10 percent could create an insurmountable block.
HP and Compaq will have a hard time resurrecting the deal if the Packard Foundation, along with the families, vote against the merger.
"If they are negative, it will probably kill the deal," said M&A attorney Dennis Block of law firm Cadwalader Wickersham & Taft. "When the foundation speaks, it will have a big impact."
"There is a great likelihood the merger won't happen if the families vote against [the merger] plus the foundation," echoed David Katz, chief investment officer of Matrix Asset Advisors, who owns stakes in both HP and Compaq. Katz, as a shareholder, has expressed his opposition to both companies.
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HP CEO Carly Fiorina | |
The management of both Compaq and HP remain committed to the merger, spokespeople at both firms said.
Early next year, HP will embark on a road show to pitch the merger to analysts, a source said.
Meanwhile, HP executives have been meeting with and will continue to meet with the Packard Foundation, CEO Fiorina said on the conference call Wednesday.
But many observers still expect the foundation to vote against the merger. "The foundation believes the merger is not in their best interest and they have a big economic and equity interest," Matrix's Katz said.
Chances of merger success
The strong fourth-quarter results bode well for the merger, said Carle Howe, principal analyst at Forrester Research.
"HP's good earnings give Carly a little more slack and a little more ammunition against the naysayers," he said. "That said, it's still a tough sell."
The chances of the merger going through are 50-50, said analyst Shelby Seyrafi of A.G. Edwards & Sons Inc. A negative from the Packard Foundation could turn the tide against the merger, he said.
The merger now has a 50 percent to 60 percent chance of going through, said influential analyst Andy Neff of Bear Stearns. But opposition from the Hewlett family and David Packard has raised concern that the merger could be voted down by shareholders - especially if the entire Packard family turns against the Compaq takeover, Neff said.
"HP's strong show [in the fourth quarter] will certainly help and add credibility to the pending merger," Neff wrote in a research note.
But the positive results are causing some to argue that there is less need for Compaq, he said. The merger doesn't solve issues faced by either company: Compaq has a weak business model and lacks execution while HP is under-invested in technology and lacks focus, Neff said in the note.
HP's solid results will cause some investors to argue that that the company is better off as a standalone, said Matrix's Katz. In contrast, a bad fourth quarter report would have built a better case against Fiorina as Hewlett's CEO rather than against the merger, he said.
"On the one hand, [HP's fourth-quarter report] gives Carly more breathing room in that this is first quarter that she hasn't disappointed so she's less under the gun," he said.
But since HP is doing well, investors may wonder about the need to muddy the waters again. "Why do we need to complicate HP with this deal?" said Katz, who does not think the earnings report will have any effect on the Packard Foundation's decision.
Resistance from the Packard Foundation would cut the odds of the merger going through to less than 50 percent, Bear Stearns' Neff said.
"The opposition by the Hewlett family came as a real surprise given Walter Hewlett's initial support," Neff wrote in research note earlier this week.
The shift raises concerns that shareholders will vote against the merger. Hewlett-Packard has not set a date for its shareholder vote, a company spokeswoman said.
An HP-Compaq merger would create a leading supplier of personal computers. "Who wants to be No.1 in a market which is saturated and has slow growth prospects near term," A.G. Edwards' Seyrafi said.
HP has retained proxy solicitation firm Innisfree M&A Inc. while Walter Hewlett hired rival proxy firm MacKenzie Partners Inc.
HP plans to file a proxy with the Securities and Exchange Commission sometime this week, which will then allow both sides to start soliciting votes. 
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