Countering the Critics

HP and Compaq respond to merger opposition with proactive pitch push.

Reeling from mounting opposition to their proposed merger, Hewlett-Packard Co. and Compaq Computer Corp. are stepping up their efforts to spin the deal in a positive light.

From the moment the deal was announced in September, the HP board and Chairman and CEO Carly Fiorina have encountered intense criticism from analysts and users alike. Critics say merging the two struggling computer makers will do more harm than good, forcing HP executives to focus time and resources on the daunting task of melding the two vast organizations, rather than on building market share, developing technologies and addressing customers needs.

HP and Houston-based Compaq launched a counteroffensive, with Compaq Chairman and CEO Michael Capellas using his keynote at Internet World in New York in mid-December to tout the merger. Meanwhile, executives with HP, of Palo Alto, Calif., stressed their companys commitment to the deal, which would create one of the worlds largest high-tech companies, with about 130,000 employees in 160 countries and with annual revenues of about $87.4 billion.

"There is no thinking of calling off the merger," Webb McKinney, president of HPs business customer organization and head of its merger acquisition team, said in a conference call with reporters.

But Rob Enderle, an analyst with Giga Information Group Inc., in San Jose, Calif., said that Compaq and HP have failed recently to adequately explain and promote the deal. "They ought to be out being very visible and vocal about arguing the advantages of this merger," Enderle said. "Theyve issued press releases, but other than that, they havent been that visible."

However, George Elling, a Baltimore- based analyst with Deutsche Banc Alex. Brown Inc., said that Fiorina and her management team have been stumping for the deal.

Still, the vocal opposition from customers and the heirs of HPs co-founders continues. Last week, Walter Hewlett, the mergers most outspoken critic, sent a letter to executives of both companies urging them to break off the deal.

"There is enormous unhappiness about this transaction," Hewlett wrote in the letter, which also was sent to the federal Securities and Exchange Commission. "If we simply continue to push forward to a shareholder vote, there will be serious and increasing adverse consequences."

The ongoing struggles of the merger are proving unsettling to customers as well. UPMC Health System, in Pittsburgh, is a major Compaq customer, with about 300 Intel Corp.-based servers, 50 Compaq Alpha servers and 60 terabytes of storage devices.

"Its a deep concern for us," Joe Furmanski, manager of systems and planning at UPMC, said of the merger, adding that it could impact future buying decisions. "Theyve offered assurances that theyll continue to be there to supply us hardware and services. But with all thats going on, Im not sure what to think."

All this comes with the backdrop of the Dec. 7 vote by the David and Lucile Packard Foundation to oppose the merger. Combined with an earlier decision by the Hewlett family heirs, the vote could collapse the deal, analysts said. Together, the families control about 17 percent of HP stock.

Andy Neff, an analyst with Bear, Stearns & Co. Inc., in New York, said its likely HP and Compaq executives are looking to restructure the deal to make it more acceptable to shareholders. "I would assume that HP will try to create a more enterprise-focused deal, with less exposure to PCs," Neff said.

Discussions between the companies merger teams likely are focusing on how HP will be structured after the buyout, which will determine which product lines are kept. So far, HP and Compaq executives have refused to divulge details of those discussions.

However, the financial terms of the deal are firm, said Compaq spokesman Arch Currid.