HP's Fiorina: Merge or wither

Caroline Humer

NEW YORK: With less than three weeks left to persuade hesitant shareholders
to back the biggest computer merger in history, Hewlett-Packard Co. chief
executive Carly Fiorina said on Wednesday her company could wither if it failed
to buy Compaq Computer Corp.

Fiorina, sounding like a politician in a tight race ahead of shareholder
votes next month, focused on a broad theme: the technology industry is
consolidating and only bigger companies that can serve customers' every need
will succeed.

"In a consolidating industry, do we ensure that our enterprise computing
business has scale to truly be a platform of choice, or do we allow it to be
subscale and slowly wither?" Fiorina asked investors.

Meanwhile, chief financial officer Bob Wayman presented the most detailed
information yet on when it expects cost savings to boost earnings and how high
restructuring charges may be. The merger would combine computer and printer
maker Hewlett-Packard with Compaq, the No. 2 PC maker, which also makes computer
servers, computer storage and offers services.

Shareholders are weighing voting with Hewlett-Packard, which on Sept. 3 said
it would buy No. 2 personal computer maker Compaq, or with Walter Hewlett, a
dissident board member and shareholder who has waged a public battle to persuade
investors to say "no."

Hewlett-Packard shareholders are due to vote on the $21 billion deal on March
19 and a Compaq vote is set for March 20, putting an end to a protracted race
that analysts say is still a toss up. Opponents have accused each other of
muddying the water with studies and personal attacks.

The merger comes at a time when Compaq has been suffering at the hands of
Dell Computer Corp., which dethroned Compaq from its spot as the No. 1 PC maker
in 2001 amid weak demand and an aggressive price war.

Waiting game

Wayman told reporters that he thought that a pending decision by Institutional
Shareholder Services would influence institutional investors' votes. ISS expects
to publish its opinion of the deal on March 4 or 5, but some investors at the
analyst meeting said they would pay less attention than usual to ISS, given the
high stakes.

Hewlett-Packard has said in the past that it believes it has enough support,
but as the vote draws near, the company has become more circumspect. "Many
shareholders are rightfully inclined to wait until the last minute to
commit," Wayman said.

Some investors have committed to the merger recently, while others are still
weighing its merits. For instance, Brandes Investment Partners recently said it
would vote its 1.3 per cent Hewlett-Packard stake against the combination.

Mona Eriba, a former Wall Street analyst turned technology fund investor for
Rosetta Management, said that she worried Hewlett-Packard had picked the wrong
mate and was neutral on the deal.

"Compaq is like Frankenstein. It's a monster company that failed to
integrate prior mergers with Digital Equipment and Tandem," she said of
Compaq's two largest prior deals. "Now we have the bride, Hewlett, marrying
Frankenstein."

Aiming to harden its financial analysis of the deal after repeated attacks by
Walter Hewlett, a son of one of the founders, Wayman forecast the merger would
generate charges for restructuring of $450 million to $700 million and an
additional $450 million to $700 million for purchase accounting and goodwill
costs.

The cash impact of the charges would be $800 million to $1.2 billion, he
said. He also estimated that earnings per share for fiscal 2003 for the combined
companies at $1.51, up 12 per cent from the Wall Street consensus for
Hewlett-Packard's stand-alone earnings of $1.35 a share.

Unlike Compaq, which has emphasized its ability to prosper even if the deal
failed, Hewlett-Packard did not offer a longer term outlook for an independent
future. "For people who are trying to think about what to do with the stock
-- there is an investor concern about what happens if this doesn't go
through," said Sanford Bernstein analyst Toni Sacconaghi said.

Hewlett-Packard shares rose 2 cents to close at $20.03, while Compaq shares
fell 20 cents to $10.20, both on the New York Stock Exchange.

Shares of Hewlett-Packard have fallen 14 per cent and Compaq is down 16 per
cent since the Aug. 31, the last trading day before the merger plan was
announced, underperforming competitor IBM, which is down about 1 per cent.