HP Deal: Two Yea, One Nay

ISS, FTC announce support for Compaq buyout; S&P warns against it.

Hewlett-Packard Co. enters the last full week before the crucial shareholder vote to determine whether it will be able to purchase Compaq Computer Corp. with two big wins under its belt.

Last week, Institutional Investment Services, a group that advises more than 700 corporate clients on stockholder issues, endorsed the proposed $22 billion acquisition.

The proposal last week also received the approval of the Federal Trade Commission.

While its still unclear whether the deal will win the necessary approval of more than 50 percent of HP stockholders, analysts said the odds greatly improved last week.

"No one is sure how this is going to turn out, but I think folks are a lot more bullish about HP being able to pull this off than they were just a few days ago," said Dan Niles, an analyst with Lehman Brothers Inc., in San Francisco. But after six months of contentious debate between HP and its opponents—including Walter Hewlett, a board member and the son of one of the companys late founders—some IT administrators just want the dispute settled.

"I think its consuming way too much energy," said Chuck Kramer, vice president of IT services for Social and Scientific Systems Inc., in Bethesda, Md. "Its kind of like the Microsoft [Corp.] trials, where everyone is saying, All right already, come to a decision and get this over with so we can get back to business."

The ISS endorsement was a key victory for HP, of Palo Alto, Calif. While only about 23 percent of HPs shareholders subscribe to ISS, the groups detailed analysis of the merger is expected to hold a lot of sway.

"If the ISS had rejected the deal, the chances of the merger going through would have been nil," Lehman Brothers Niles said.

While HPs chairman and CEO, Carly Fiorina, lauded the ISS decision, not surprisingly, Hewlett denounced the endorsement.

"ISS clearly has a predisposition to support management and makes a general presumption that boards do the right thing," Hewlett said in a statement. "In the post-Enron [Corp.] world, it is obvious that these assumptions need to be questioned. This transaction has substantial and unacceptable integration risks."

The next day, FTC regulators said they "did not find reason to believe that the proposed transaction would impair competition."

But while the proposed merger cleared two key hurdles, it suffered another setback last Thursday when Standard & Poors lowered HPs credit rating.

While the rating agency said it "recognizes the strategic validity of the merger," it said integrating the two companies poses serious challenges. However, even if there were no acquisition plan, S&P said it would have lowered HPs rating, given the weak outlook in the high-tech industry.