Merger in Packard Foundations Hands

HP's planned buyout of Compaq reaches a critical juncture, as the copmany's largest shareholder begins deliberating whether to support the deal.

Hewlett-Packard Co.s planned buyout of Compaq Computer Corp. reached a critical juncture on Friday as the companys largest shareholder, the Packard family foundation, began deliberating whether to support the controversial deal.

The 12-member board of the David & Lucille Packard Foundation, which controls about 10 percent of HPs shares, gathered today in Palo Alto, Calif., to hear representatives of consulting firms hired by the foundation, HP and opponents of the deal argue the merits of the proposed $23 billion merger.

Recently, a foundation spokesman said the board would decide on the deal after meeting on Friday, but added that a vote might not be taken for several days or weeks after Fridays gathering.

Should the foundation side with the Hewlett family, which last month declared it would vote its 5 percent share of HP stock against the deal, the merger would collapse, one analyst said.

"If the Packard foundation votes against it, I think you would pretty much have to say it would take a miracle to pull the deal off," said Dan Niles, an analyst with Lehman Brothers, in San Francisco.

HP and its chairman and CEO, Carly Fiorina, have come under harsh criticism from investors and analysts since the deal was announced in early September.

Critics contend the merger of the two struggling computer makers will do more harm than good, forcing HP executives to focus time and resources on the daunting task of melding the two vast organizations, rather than on building market share, developing new technologies and addressing customers needs.

The marriage of HP and Compaq is seen as a poor coupling in large part because of the huge overlap in product lines between the two companies, particularly in servers and personal computers.

Last month, Walter Hewlett, eldest son of HP co-founder William Hewlett, detailed many of arguments against the merger in a public declaration he issued opposing the deal, as well as in a government filing in which he formally stated his familys plans to lobby shareholders against it.

"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 the statement, dated Nov. 6.

In another blow to the merger, David Packard, son of the other HP co-founder, publicly declared that he sided with Hewlett familys decision.

But Packard, who resigned from the companys board in 1999, only controls 1.3 percent of HP stock and is not a member of the more influential Packard family foundation, which is headed by his sister, Susan Packard Orr.

Orr, 55, is chief executive of the Technology Resources Assistance Center, which produces software programs for nonprofit groups, and served on the HP board until February. Orr was also on the panel that recommended hiring Fiorina as CEO in 1999.

Since announcing the merger three months ago, Fiorina has been lobbying shareholders and analysts to alleviate their concerns and promote the deal as a smart move that would make HP, of Palo Alto, a more powerful competitor.

"Trust me, this team is determined and motivated to prove the skeptics around this combination wrong," she told attendees at International Data Corp.s European IT Forum, in Monaco, in September.

Fiorina also rejected arguments that HP was acting out of desperation amid eroding market share and profitability.

"This is not a defensive move; its an offensive move," Fiorina told the audience. "We intend to reshape the economic structure of the industry and force our competitors to respond. This combination will do that."

HPs fortunes fell dramatically this year amid an industrywide downturn in computer sales. Last month, the company posted quarterly earnings of $97 million, down 89 percent year-over-year. In addition, the computer maker announced the largest layoffs in its history, with 6,000 job cuts expected this year and potentially more next year.

Compaq, of Houston, has struggled even more, posting a loss of $499 million, worse than even analysts dour predictions, during the third quarter. The company has also been slashing its staff to reduce operating costs and has announced plans to cut 8,500 jobs this year.

The merger would result in an additional 15,000 layoffs, according to executives with both companies.

If the merger wins approval of shareholders and government regulators, the new HP would have a work force of about 130,000 employees in 160 countries and annual revenues of about $87.4 billion.