Exec: HP Has No Plans to Back Out

Seeking to counter a barrage of negative news reports, a senior executive with Hewlett-Packard Co. said today the company has no plans to abandon its controversial $25 billion bid to acquire Compaq Computer Corp

Seeking to counter a barrage of negative news reports, a senior executive with Hewlett-Packard Co. said today the company has no plans to abandon its controversial $25 billion bid to acquire Compaq Computer Corp.

"There is no thinking of calling off the merger," said Webb McKinney, who heads HPs merger acquisition team, in a conference call with reporters.

The news conference followed recent speculation by market analysts that HP might withdraw its merger proposal in light of last weeks rejection of the deal by the companys largest shareholder, the Packard family foundation.

McKinney, a 32-year HP veteran appointed by company Chairman Carly Fiorina to oversee the planned acquisition of Compaq, insisted that the deal remains on track, and sought to dispel what he claimed were misperceptions being reported about the merger.

In particular, McKinney accused critics of misrepresenting the goals of the deal, the two companies reliance on PC sales, overlaps in product lines, and even HP employee morale.

The conference call with reporters today coincides with stepped up efforts by leaders of both companies to lobby harder for the merger, which in recent weeks has suffered a number of setbacks, including the publicized rejection of the deal by the heirs of HPs co-founders.

Last Friday, HPs largest shareholder, the David and Lucile Packard Foundation, announced a preliminary decision to vote against the merger. Faced with opposition from the foundation and Hewlett family heirs, which together control about 17 percent of HP stock, many analysts have speculated that the deal would collapse.

McKinney sought to downplay the rejection of the merger by HP heirs, and noted that the foundations view of the deal was not likely to be shared by institutional investors, who hold control the majority of HP stock.

While McKinney didnt expand on those comments, executives at HP and Compaq have privately argued that HP heirs are opposed to the deal in large part because they fear it will erode their once considerable influence over the company founded the late William Hewlett and late David Packard in Palo Alto, Calif.

The HP executive also argued that critics have overstated the importance the PC business will have should the two computer makers merger. In fact, based on last years sales, a merged HP-Compaq would become the world&s largest PC vendor, surpassing current title holder Dell Computer Corp.

But while PC sales were once the drivers of high-tech growth in the 80s and 90s, recent price wars and sluggish growth have undermined PC industry profits, spurring companies to disdain what was once a leading business.

Critics of the merger, such as Walter Hewlett, a member of HPs board of directors, have argued that the merger would dramatically increase the companys exposure to the slumping market, resulting in a drain on revenue and resources.

While "PCs are an important business for both companies," McKinney said, he denied that the market segment would overshadow the merged companys objectives.

"This merger was really motivated from the strategic work we were doing in the enterprise area," he said. "The real genesis of the deal and the primary focus of the deal has been around strengthening our ability to serve global enterprise customers, to add to our services capability, strengthen our server, storage and software positions."

And while HP and Compaq have both struggled to achieve profitability in their PC businesses this year, McKinney said, the merging of the two PC units should enable the companies to better compete.

"We do believe that by putting our two PC businesses together it will put us in a much better position, to build not only the biggest PC company, but one that has the best cost structure and the one that will continue to lead in the future," he said.

Another misperception of the deal, McKinney said, concerns criticisms that the two companies have too much in common. In essence, detractors contend that melding too largely overlapping product lines will create customer confusion, and that the elimination of similar products will likely alienate customers HP hoped to gain through the merger.

But while general product categories may overlap, McKinney said, the targeted customers do not.

"Some people said that there aren¡¯t any real value-added synergies, there are just duplicate product lines. That is clearly not true," he said. "In the server business for example, the companies have strength in very different areas. Even in our services and solutions business, if you look at our industry focus, they are quite complimentary."

McKinney also sought to down play reports that many HP employees are opposed to the merger, with recent news stories suggesting morale inside the company has fallen precipitously since the merger was announced in early September.

In large part, workers are said to be fearful of losing their jobs if the deal goes through. HP and Compaq have already said that they expect to cut 15,000 jobs should the two companies merger, but analysts have cautioned that the number could run far higher.

"Where as with any big merger like this is going to be unsettling to employees, weve been taking professional survey data right after the merger, after Walter Hewletts announcement (opposing the deal), after the foundation vote, and they continue to show that the majority of HP employees are in fact supportive of the merger," McKinney said

In summary, the veteran HP executive said the merger represents just another chapter in the continued evolution of the high-tech industry, where adapting to change is crucial to success.

"Ive been with HP for 32 years. Ive seen a lot of change, change is challenging, but it is also necessary," McKinney said. "If you dont change, youre falling behind, and Im very confident in the business rational and our ability to successfully execute this merger."