Deal Denunciation Puts Fiorina in Hot Seat

Support for HP's proposed buyout of Compaq, as well as for HP CEO Carly Fiorina, appears to be wavering after heirs of the company's founders went public with their opposition to the deal.

Support for Hewlett-Packard Co.s proposed buyout of Compaq Computer Corp., as well as for HPs chairman and CEO, Carly Fiorina, appears to be wavering after heirs of the companys founders went public last week with their opposition to the deal.

Fiorina has staked her career on the $20 billion merger with Compaq that would create the worlds largest PC company. The resulting company would also boast operations in more than 160 countries, a work force of about 130,000 employees and annual revenue of about $87.4 billion.

Though the deal has been controversial since its announcement Sept. 4, it was dealt a severe blow last week when Walter Hewlett, son of HP co-founder William Hewlett and a member of the companys board of directors, denounced the merger and declared that his family will vote against it. The Hewlett heirs control about 5 percent of HPs stock.

While the boards of HP and Compaq have approved the merger, it still requires the approval of stockholders and government regulators.

Last weeks announcement marks an about-face by Hewlett, who just two months earlier joined in the unanimous support for the merger from HPs board of directors.

Following Hewletts public statement, David W. Packard, son of HP co-founder David Packard, disclosed that he, too, opposed the buyout. Packard controls about 1 percent of HPs stock.

"To have representatives of both families come out and basically give the chief executive a no-confidence vote, it makes it very difficult to see how the chief executive survives," said Rob Enderle, an analyst with Giga Information Group Inc., in Santa Clara, Calif.

Others agreed.

"If the shareholders vote against this deal, it is hard to see how she will remain," said Dan Niles, an analyst with Lehman Brothers Inc., in San Francisco. "At this point, the chances of the deal going through have to be 50-50, at best. Its going to be one historic battle."

Fiorinas hold on power and the mergers future may be decided in the coming weeks when the board of directors of the David and Lucile Packard Foundation declares its position on the deal. A spokesman for the foundation, which controls about 10 percent of HP shares, said it will vote on the merger after the Palo Alto, Calif., company issues its quarterly earnings Thursday. The board is scheduled to meet Dec. 7.

Given the close relationship between the Hewlett and the Packard families, Enderle said hed be surprised to see the Packard foundation support the merger.

In the face of mounting opposition, HPs board—with the notable exception of Hewlett—last week once again voted in favor of the proposed merger. In addition, board members declared their support for Fiorina.

"The board thoroughly analyzed this transaction and unanimously concluded this is the very best way to deliver the value our shareowners expect," said Dick Hackborn, former chairman and executive vice president of HP. "Under Carlys leadership, the new HP will continue to be an innovation leader with a culture focused on trust, teamwork, accountability and contribution."

Nevertheless, the rejection of the merger by heirs of the late co-founders has significantly undermined the deal, analysts said.

"This is clearly a setback," said Andy Neff, an analyst with Bear, Stearns & Co. Inc., in New York. "We would say the odds of the deal closing have dropped from 90 percent to only about 60 percent."

In opposing the deal, Hewlett argued that absorbing Houston-based Compaq would increase HPs exposure to the "unattractive PC business" and weaken shareholders stake in the profitable printer business, where HP stands as the industry leader.

"I firmly believe that partnering with Compaq will not give Hewlett-Packard what it needs most to create additional stockholder value—expansion of its printer and imaging business as well as the higher-end segments of its services and server businesses," Hewlett said in a prepared statement.

He not only is a member of HPs board of directors but also serves as chairman of The William and Flora Hewlett Foundation and is trustee of the William R. Hewlett Revocable Trust. According to Hewletts release, he was also speaking on behalf of his sisters, Eleanor Hewlett Gimon and Mary Hewlett Jaffe, who together with the trust and foundation control about 5 percent of the companys stock.

After Hewletts statement, Packard admitted that he, too, opposed the merger. But Packard, who resigned from the companys board in 1999, said he wasnt speaking for the Packard family foundation, which is chaired by his sister, Susan Packard Orr.

In first announcing the deal, Fiorina and Compaq Chairman and CEO Michael Capellas touted it as creating a powerful new competitor in the high-tech arena. "At a particularly challenging time for the IT industry, this combination vaults us into a leadership role with customers and partners," Fiorina said at a Sept. 5 news conference.

But many investors and analysts quickly condemned the deal, spurring a sell-off in the stock of both companies that sent shares tumbling to multiyear lows.

It also opened the door for rivals, such as IBM and Dell Computer Corp., to try to steal away customers unhappy with the proposal.