HP Family to Vote Against Compaq Buyout

HP's proposed buyout of Compaq was dealt a severe blow Tuesday as family members of one of HP's co-founders announced their opposition to the merger.

Hewlett-Packard Co.s proposed buyout of Compaq Computer Corp. was dealt a severe blow today as family members of one of HPs co-founders announced their opposition to the merger.

The children of HP co-founder William Hewlett, who oversee the family trust and foundation, and together own more than 100 million shares of HP stock, declared Tuesday that they have reached a "preliminary conclusion" to vote against the merger.

"I believe that Hewlett-Packard can create greater value for stockholders as a stand-alone company than as a company combined with Compaq," said Walter Hewlett, William Hewletts son, in a statement issued today.

The announcement marks a dramatic change of heart by Walter Hewlett, who previously joined in a unanimous decision by HPs board of directors in favor of the merger.

Market analysts said the familys decision significantly decreases the chance the deal will go through.

"Its a surprise," said Andy Neff, a market analyst with Bears Stearns in New York. "This is clearly a setback to the deal. We would say the odds of the deal closing have dropped from 90 percent to only about 60 percent."

The statement announcing the familys decision was attributed to Walter Hewlett, a member of HPs board of directors, who also serves as chairman of The William and Flora Hewlett Foundation and is trustee of the William R. Hewlett Revocable Trust.

According to the release issued this morning, Hewlett was also speaking for his sisters Eleanor Hewlett Gimon and Mary Hewlett Jaffe, who together with the trust and foundation control about 5 percent of the companys stock.

"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," Walter Hewlett said.

In particular, he contended that absorbing Compaq would increase HPs exposure to the "unattractive PC business" and weaken shareholders stack in the more profitable printer business, where HP stands as the industry leader.

"Given the lack of stockholder benefits," Hewlett said, "I believe the extensive integration risks associated with this transaction are not worth taking."

But Hewletts reasons for opposing the deal probably comes down to the companys falling stock price more than anything else, said Dan Niles, a market analyst with Lehman Brothers in San Francisco.

"He voted for the merger, then the stock went down, and now hes an unhappy shareholder," Niles said. "A lot of this stuff hes brought up have been the negatives all along, so he knew all this when he voted to approve the deal in the first place. So whats different now? The stock price."

After the merger was announced Sept. 4, industry analysts and shareholders soundly rejected the deal, highlighted by stock selloff that sent the shares of HP and Compaq to multiyear lows.

As a result, the deal that was initially valued at $25 billion based on market capitalization saw its value plummet to only about $16 billion in the weeks following the announcement.

The Hewlett familys opposition marks the mounting problems facing the HP and Compaq deal, which still must gain the approval of U.S. and European government regulators.

In addition to massive internal challenges of integrating multiple product lines and services into a single cohesive business, the HP and Compaq face increasing external challenges as well.

Just one week after announcing the deal, terrorist attacks in New York and Washington sent stock markets reeling and further eroding already weak sales amid an industry-wide slump. In addition, gloomy U.S. economic forecasts recently are expected to cause companies to rein in their IT spending, further undermining HPs and Compaqs sales.

In first announcing the deal, HP Chairman and CEO Carly Fiorina and her counterpart at Compaq, Michael Capellas, touted the deal as creating a powerful new competitor in the high-tech arena, second only in size to IBM.

"At a particularly challenging time for the IT industry, this combination vaults us into a leadership role with customers and partners -- together we will shape the industry for years to come," Fiorina said at a Sept. 5 news conference in New York.

Since that time, executives of HP and Compaq have lobbied hard to win support of investors and major corporate customers. But todays announcement by the Hewlett family will make selling the merger much more difficult.

"At this point, the chances of the deal going through have to be 50-50, at best," analyst Niles said. "This is going to be interesting to see how it plays out. Its going to be battle, and well have to see where it goes from here."