HP results may help merger efforts

Hewlett-Packard took a big step toward getting shareholder approval for the
Compaq merger when the company announced stronger than expected results, despite
an 89 per cent drop in fourth quarter profits.

HP earned $97 million, down 89 per cent from its profit of $922 million in
the same period last year. Sales fell to $10.9 billion in the quarter from $13.3
billion a year ago, but that was up from the third quarter's $10.3 billion. For
all of fiscal 2001, HP earned $408 million on revenue of $45.2 billion. That
compares to $3.7 billion in net income in fiscal 2000 on revenue of $48.8
billion. In December of last year, Fiorina predicted sales would increase to
$57.3 billion.

The results were welcomed by the Packard Foundation, which may hold the key
to the fate of the Compaq merger. "I think the fourth quarter earnings were
very encouraging. They were strong earnings, they beat estimates, and that is
good.

Anything that has the stock turning up is certainly welcome, and it shows
some strength in their markets," said George Vera, chief financial officer
of the David and Lucile Packard Foundation. The Packard Foundation, which has
seen its endowment shrink from $18 billion to less than $6 billion in less than
one year, is reviewing its position on the Compaq merger. The foundation does
not have a seat on HP's board but controls 1/6th of HP's outstanding shares.

Meanwhile, HP CEO Carly Fiorina made another seemingly ill-advised move by
attacking the media, accusing reporters of creating the feud between HP and the
heirs of the company's founders. "I get frustrated when I see lazy
reporting on complicated issues. It is far easier to dream up a feud that
doesn't exist than to research complex, far-reaching, industry-changing business
concepts."

Fiorina blamed "shallow reporting" by reporters and Wall Street
analysts too "focused on the short term" for the difficulties facing
the $23 billion merger with Compaq. "Some media reporters think they have a
story they can use to sell newspapers."

The comments won Fiorina a flurry of highly critical and often satirical
commentaries from newspaper, radio and TV reporters and analysts. If anyone is
fueling the feud, it is HP Board member Walter Hewlett who filed papers this
week with federal regulators outlining his objections to the merger. Beside
noting that large mergers in the high-tech industry almost never produce a
positive result, the 70-page report predicts that the combined company will
likely see revenue shortfalls of 10-15 per cent in the first two years after the
merger, far worse than any of the projections made by HP.

But HP director Richard Hackborn, the former interim chairman and once
considered a contender for the position now held by Fiorina, disagreed, saying
the Compaq merger is the best way for Hewlett-Packard Co. to improve the
economics of its computer and printer businesses and solve other lingering
problems. "I don't see us getting there any other way,'' director told HP's
86,000 employees in a video message broadcast over HP's intranet.

"We've looked at it from a number of different angles. Could we do more
inside? Could we do something with some other company? And nothing comes across
as clearly as this merger with Compaq.''

In a much-telling move, Hackborn, a 30+ -year HP veteran, never once
mentioned Fiorina, who is universally disliked among HP workers, in his video
message. But Hackborn made it clear that the HP of the past is no more.
"With or without the merger, we've got to do things different. There's no
way in my view that the company can stay the same - let alone go back - and be
the kind of company that I personally think Bill and Dave would be proud of.''

Analysts said that in the end, investors will vote based on whether they
think the merger will make or cost them money. In that respect, Fiorina scores
the equivalent of a Home run by reporting fourth quarter profits that were
double of what Wall Street had anticipated.

In an effort to alleviate concerns that she and Compaq CEO Michael Capellas
were more interested in personal gain from the merger than the interests of
shareholders, Fiorina announced that they had withdrawn from a bonus program
that would have paid them $22.4 million for completing the merger. Fiorina would
have received $8 million, or two times her annual salary and target bonus, while
Capellas would have been paid $14.4 million - three times his annual
compensation package. Capellas will still receive a $14.4 million in severance
payment if he loses his job during the first year after the deal closes.

Another 10 HP executives will receive a total of $33.1 million from the
merger completion. Other Compaq executives would be paid a total of $22.4
million if they remain with the combined company through the first year. Another
obstacle HP and Compaq will have to overcome is the Federal Trade Commission
that has asked both companies for more time to review the $23 billion deal.

But HP's biggest obstacle will be getting the support of the Packard
Foundation. Last week, Vera said the group would announce a decision after the
fourth-quarter results. But this week that schedule was changed. "There is
a lot of material here to digest. Our target is sort of sometime in December or
early January." Finally, HP, according to papers with the Securities and
Exchange Commission, revealed that her company had been looking at taking over
Compaq for as long as two years. However, merger talks started shortly after
June of this year when Fiorina approached Capellas with an offer to lease
Hewlett-Packard's high-end computer operating system, HP-UX.

"After several days of deliberation, Mr Capellas contacted Ms Fiorina to
suggest that the synergies between the two companies were broader than HP-UX and
that HP consider whether a broader strategic relationship might be a viable
option," HP said in the filing.

Months of talks ensued. Capellas and Fiorina could not agree on terms
including "valuation concepts and issues, the governance and management of
the combined company and strategic synergies." On August 5, Compaq's board
turned down the deal, deciding not to take discussions further on terms offered
by HP. The next day HP's board authorized Fiorina to continue talks, and by
August 23, Fiorina and Capellas reached an understanding.