HP Directors: Merger Rejection Will Mean Disruption

Two HP board members raised the specter of a potential mass exodus of the computer maker's leadership should shareholders reject the proposed $22 billion buyout of Compaq in a March 19 vote.

Hewlett-Packard Co.s board and many of its senior managers may resign if shareholders reject the companys proposed buyout of Compaq Computer Corp., two HP board members strongly hinted on Monday.

Their comments in a conference call with reporters today once again raises the specter of a potential mass exodus of HPs leadership should the companys shareholders reject the proposed $22 billion buyout of Compaq in a March 19 vote.

While Compaq shareholders are widely expected to support the merger when they vote March 20, HPs vote is seen as a tossup, due largely to strong opposition from the families of HPs late co-founders, led by Walter Hewlett, who sits on the Palo Alto, Calif., companys board.

The potential departure of HPs top executives was first raised in December, when HP director Richard Hackborn told The New York Times that investors "will have to get a board and a management" if the deal falls through. Lawyers representing merger foe Hewlett denounced the comments as "shocking," and claimed that they amounted to threats against investors.

But such a departure scenario appeared more likely today as HP directors Phil Condit, who also serves as chairman and chief executive of Boeing Co., and Sam Ginn, the retired chairman of Vodafone AirTouch Plc., warned that they and other managers might resign should the deal collapse.

"Walter (Hewlett) has said there will be no disruption if this merger is voted down. That is simply not the case," Condit said. "This proxy contest itself has already created significant disruption. And if this merger were to be defeated, it would create for the disruption."

Should HP shareholders reject the deal, HP executives would face an "inherent conflict" about whether they remain with the company after such a stinging rebuke from investors.

"We have a huge commitment to this merger because we think it is our very best alternative," Condit said. "Individually, we will have personal conflicts if this merger is voted down. Well have a personal decision to make. … Likewise, each member of the management team will have a personal decision to make."

While Condit and Ginn said they had made no final decisions, they made it clear that they were prepared to walk away if the deal falls through.

"I understand our fiduciary responsibility," said Ginn, noting that he wouldnt just "walk away and pout."

"I am just pointing out for those who havent thought through this that a no vote basically causes an inherent conflict in current board members," he said. "I cant predict how I am going to deal with it."

Such comments highlight the fact that voting down the merger is not without its risk, said market analyst Daniel Kunstler of J.P. Morgan.

"Regardless of how you feel about the strategic merits of the deal, were six months into this," Kunstler said. "There is no plan B right now, so there is definitely the shadow of some uncertainty hovering over this."

Condit and Ginn also used the news conference to once again emphasize their support for the deal, citing their previous experience in successfully overseeing the mergers of Boeing and McDonnell Douglas, as well as Vodafone and AirTouch.

"Big mergers can work," Condit said. "Both Sam and I know this because we have each done them."

The HP directors also panned Hewletts alternative "execute and focus" strategy, which the merger foe claims would dramatically boost HPs profit margins and stock value as a stand alone company in large part by increasing its focus on its market leading imaging and printing business.

"Walter has said that his alternative could increase shareholder value by $14 to $17 per share. This is not grounded in reality," Condit said. "If it were that easy to double our margins and restructure the business for profitability to create $14 to $17 per share, this board – and this board has considerable business experience – would have demanded exactly that result."

Although merger opponents contend the deal could undermine shareholder value and cost the company market share, Condit and Ginn said the acquisition of Houston-based Compaq will significantly strengthen HP, broaden its reach, and enable it to evolve into a solutions-based company.

"There was a fundamental decision in the boardroom about whether we sell equipment as we have traditionally done – meaning that we sell PCs, printers, calculators and so forth – or are we better off selling solutions," Ginn said. " I think one of the differences between Walter and ourselves is we believe that the future this company is selling solutions."

HPs largest investors agree with that strategy, Condit said.

"While we cannot predict the outcome of the vote," he said, "the company is in close contact with HPs top institutional investors and we believe we have the support of most of our 20 largest shareholders."

In a statement released after the conference call, Hewlett avoided commenting on the criticisms leveled at him and said he was gratified that Condit and Ginn expressed their commitment to their "fiduciary duty."

"We know that the directors of HP are professional people and we are confident that if they have any conflicts over the mergers defeat they will deal with them in a professional manner," Hewlett said. "Mr. Condit and Mr. Ginn do not indicate that any individual director would be leaving and said no board member would consider leaving without first ensuring an appropriate replacement was available."