Merger Bad For Business, Hewlett Family Member Says

Walter Hewlett, eldest son of H-P co-founder William Hewlett, today detailed his family's opposition to the company's proposed buyout of Compaq in a government filing.

Walter Hewlett, eldest son of Hewlett-Packard Co. co-founder William Hewlett, today detailed his familys opposition to the companys proposed buyout of Compaq Computer Corp. in a government filing, citing economic factors, the complexity of the merging of two large companies, and even quoting executives of rival Sun Microsystems Inc. belittling the deal.

The 70-page statement filed with the Securities Exchange Commission is a compilation of excerpts from research reports and market analysts, and includes more than three dozen charts highlighting such things as stock price fluctuations in recent weeks and industry trends broken down by market segment.

The filing comes 10 days after Hewlett first publicly opposed the merger, announced Sept. 4, in a statement released by his lawyers. Hewlett, who sits on HPs board of directors, said his views also represent those of his two sisters, Eleanor Hewlett Gimon and Mary Hewlett Jaffe.

In addition, he said Edwin Van Bronkhors and the Hewlett Revocable Trust support his actions.

"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," Hewlett said in a statement on Nov. 6.

The Hewlett family and the Hewlett trust control about 5 percent of the HPs shares, but the familys high profile and influence among company shareholders could unravel the deal, especially if the Packard family heirs, who control more than 12 percent of HPs stock, join them in opposition.

While David W. Packard, son of late HP co-founder David Packard, has sided with the Hewletts, he only controls about 1 percent of the companys shares. His three sisters who oversee the Packard family foundation have yet to voice an opinion on the matter.

But some analysts believe the Packard foundation will likely follow the Hewletts lead.

"It would be unusual for the Hewlett family to come out on one side and the Packard family on the other," said Rob Enderle of the Giga Information Group. "Those two families are relatively close."

In first announcing the deal, HP Chairman and CEO Carly Fiorina proclaimed the merger would create a powerful new competitor in the high-tech arena.

"This combination vaults us into a leadership role with customers and partners," she said Sept. 5 at a New York news conference.

On paper, combining HP and Compaq would certainly create sizeable new competitor in the high-tech industry, with a work force of about 130,000 employees based in 160 countries and annual revenue of about $87.4 billion.

But many industry analysts and shareholders quickly condemned the deal, setting off a stock sell-off that sent HPs shares to a multi-year low.

In todays filing, Hewlett included a chart highlighting that stock drop as well as a slight surge in the price of shares following his announcement opposing the deal, suggesting that many shareholders agree with Hewletts views.

Calling In Third Party Support

Hewletts report to the SEC includes several comments critical of the merger culled from various research and news reports, including from rival companies.

"Its a gold mine for us," Michael Lehman, Suns chief financial officer, was quoted as saying in a Reuters story. "It makes them a larger, more confused competitor."

While no quotes attributed to Hewlett are included in the report, he outlined his concerns in his first public statement on the matter earlier this month.

Hewlett 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," Hewett said, "I believe the extensive integration risks associated with this transaction are not worth taking."

A day after Hewlett voiced his opposition, HPs board voted once again in favor of the proposed $20 billion acquisition of Compaq, with the exception of Hewlett.

"The board thoroughly analyzed this transaction and unanimously concluded this is the very best way to deliver the value our shareowners expect," said Dick Hackborn, former chairman and executive vice president of HP.

Despite the high-profile opposition to the deal, the HP-Compaq merger may still go through, said one analyst, who contends hes seen little visible opposition aside from the Hewlett and Packard families.

"Its hard to say how things will go from here," said Andy Neff, a market analyst with Bear Stearns in New York. "Until the day of the vote, you can always change your mind. Well just have to wait to see what happens."

In addition, Neff said theres some question whether HP can call off the merger. While the merger contract between HP and Compaq stipulates that one company would have to pay the other $675 million to break the deal, Neff said thats a misinterpretation of the agreement.

"Hewlett cannot walk away from the deal. It has to be mutually agreed," Neff said. "If HP calls up Compaq and says we changed our mind, Compaq could say, "Oh, thats interesting, but were going forward and doing the deal.

It appears, he said, that HP would have to detail some specific performance problems on Compaqs part to break the agreement.

"Theres more involved in this than some people think," Neff said. "So Im not sure what will happen if shareholders vote this down."