Packard Foundation vote may doom HP-Compaq merger

In a stunning defeat for HP CEO Carly Fiorina, the David and Lucille Packard

Foundation, HP's largest shareholder with a 10 per cent stake in the Palo Alto

computer company, announced it will vote its shares against the proposed $25

billion HP-Compaq merger. The decision sets the stage for what could become a

bitter proxy battle between HP and the children of Bill Hewlett and David

Packard. Others expect HP to soon cancel the deal and fire Fiorina.

With their decision, all of the founder's children have come out in

opposition to the merger. Together, they control 18 per cent of HP's outstanding

shares. Because not all shares are voted the stake amounts to 20-25 per cent of

the total votes that may be cast if HP puts the merger to a shareholder vote.

HP officials vowed they would continue to work towards completing the merger.

"We are disappointed by the Packard Foundation's preliminary decision.

Nevertheless, our responsibility to shareowners, customers, and employees

requires that we maintain a pragmatic view of the business and a focus on the

future. Our firm commitment to this merger stems from our conviction that it

will deliver the industry leadership and earnings growth our shareowners expect

and our employees deserve," HP said in a press release.

Industry and Wall Street analysts were divided on the impact of the Packard

Foundation’s decision. Some said the merger is essentially dead in the water.

''The street has voted on this deal from Day One. It is as good as dead at this

point," said Ashok Kumar, an analyst at US Bancorp Piper Jaffray.

Others believe the deal could still be approved by shareholders if Fiorina

can muster a successful campaign to solicit the support of HP's other major

shareholders. But the odds are now heavily stacked against Fiorina because many

institutional investors will accept the verdict of the Packard Foundation.

The organization had hired Wall Street consultants to analyze the merger that

concluded that the deal is likely to depress HP shares for years to come.

The Foundation does not have the option to sell its HP shares as per the will

of founder David Packard. As such the organization depends entirely on HP's

stock performance for its charitable revenue. In the past year, its assets have

been reduced from $18 billion to just $5 billion. Apparently the Foundation

believes that HP's shares will fare better without the Compaq addition. Many

other investors are likely to vote based on that conclusion.

Walter Hewlett, an HP board member and the first of the heirs to voice his

opposition to the merger said he will initiate a campaign to ask other HP

shareholders to assign their voting rights to him should HP decide to put the

merger to a vote. ''I believe there is sizable and widespread opposition to this

transaction,'' said Hewlett.

Following the Packard Foundation's decision, many doubt that HP's board of

directors will even put the merger up for a vote. With so much opposition to the

merger from both the heirs and investors on Wall Street, the board may decide to

cancel the merger rather than expose the company to all the negative publicity

associated with a shareholder proxy battle.

Should the merger be called off, HP will have to pay Compaq $675 million in

cancellation compensation. It will also spell the end of Fiorina who has vowed

that her future with the company rests on the successful completion of the

merger. ''I think the company's success will be my legacy.

The company's failure will be my failure, with all the predictable

consequences," Fiorina said in October.

"I guess Carly will be looking for a new job," said US Bancorp

Piper Jaffray analyst Ashok Kumar. "I don't see a scenario how she stays

on...This is basically her last straw to revive the company. This is going to be

her epitaph at HP."

The opposition to the deal is based on the contention that the integration of

Compaq will cause HP to get stuck with a bloated, low-profit personal computer

business. The company stands to lose customers and sales while management is

distracted by the overwhelming task of combining a global work force of 135,000.

On Wall Street, news of the Packard Foundation's opposition sent HP shares 10

per cent higher while Compaq shares lost 12 per cent of their value. Some

analysts speculated that HP and Compaq may renegotiate the merger terms in an

effort to get the Packard Foundation to change its position on the deal. The

Foundation said its decision against the merger was "preliminary,"

which could be interpreted as an invitation to HP to try to restructure the

merger. Some suggested HP could offer to spin off or sell the low-profit PC

business or ask Compaq for a lower merger price.

But the price would have to be substantially lower. Walter Hewlett on Friday

said that based on Wall Street's expectations for Compaq's earnings in the

coming year HP was overpaying by offering the equivalent of 90 times Compaq's

forecasted 2002 earnings.