Hewlett, HP Trade More Jibes

The leading critic of Hewlett-Packard's proposed buyout of Compaq said HP would double its profit margins and see its stock soar if it dumps the merger and pursues a more conservative growth plan.

Walter Hewlett, the leading critic of Hewlett-Packard Co.s proposed buyout of Compaq Computer Corp., said on Tuesday that HP could double its profit margins and see its stock price soar up to 90 percent in a year if the company dumps its merger plan and pursues a more conservative approach to growth.

With the fate of HPs controversial $25 billion buyout to be determined at a shareholder vote March 19, Hewlett and HPs other board members are increasing lobbying of investors to support their opposing views. The debate has grown increasingly bitter in recent weeks.

Rather than a high-risk acquisition, Hewlett on Tuesday argued that the company should implement a "focus and execute" strategy. This would aim to boost the Palo Alto, Calif., companys imaging and printing division, increasing sales to mid- and high-enterprise customers, and boost the profitability, not the size, of its PC business.

"What I have been presenting to stockholders is a set of guidelines that offers a framework within which superior stockholder value can be achieved at much lower risk than betting HPs future on scale, commodity hardware and a protracted, risky integration," Hewlett said in his release. "The opportunity to double the margins and add $14 to $17 in value with a conservative approach is far preferable to the proposed merger with Compaq that we believe will destroy stockholder value."

HP, on the other hand, contends the merger presents the best option for ensuring future growth. Officials said it would result in an additional $2.5 billion in combined operating profits annually by 2004, improve the efficiency of HPs PC business, boosts its share in several key markets, and dramatically enhance its services business.

Since it was announced in September, the deal has come under widespread criticism from investors and industry analysts who have derided it as a desperate move aimed at reinvigorating two struggling high-tech companies.

Hewlett emerged as the leading opponent of the merger in November when he publicly denounced the deal as a misguided and costly mistake that would further undermine HPs lagging fortunes.

In December, the Packard family foundation joined Hewlett in rejected the merger, creating sizeable opposition as the two families control 17 percent of HPs share. For the merger to proceed, HP must win the support of 50 percent of its stockholders.

As the shareholder vote looms closer, the lobbying efforts of HP and Hewlett have become increasingly bitter, with each side accusing the other of misleading shareholders. Both sides have also engaged in personal attacks targeting HP Chairman and Chief Executive Carly Fiorina and Hewlett.

In recent news interviews, Hewlett has called for the ouster Fiorina, while HP has sent shareholders reports belittling Hewlett as an "academic and musician" who failed to attend board meetings.

On Tuesday, Hewlett attacked the companys recent claims that the board had long debated buying Compaq before reaching a decision last year.

"HPs assertion that the Compaq merger is the culmination of a two-and-a-half year planning process is simply false," he said. "The Compaq merger is the culmination of a surprise telephone conversation between Carly Fiorina and (Compaq Chairman and CEO) Michael Capellas which occurred only a few short months before the merger was announced."

In particular, Hewlett said a plan to buy Houston-based Compaq wasnt discussed until HPs $18 billion bid to buy consulting giant Price Waterhouse fell through in early 2001.

"That is not careful planning and execution," he said. "It is haphazard and reactive."

Hewlett has argued that the buyout of Compaq would increase HPs exposure to the "mature and unprofitable PC business" at the expense of its more profitable businesses, particularly imaging and printing. The dissident board member also claims the cost of merging the two massive companies would undermine profits and divert managements attention from focusing on customers.

Should the merger win the approval of HP and Compaq shareholders and get the green light from U.S. regulators, the combined companies would create a sizeable new competitor, with a work force of about 130,000 employees based in 160 countries and annual revenue of about $87.4 billion.

According to HP, the new entity would assume the top spot in multiple industry market segments, including PCs, Windows and Unix servers, and enterprise storage.