Packard Foundation Votes Against HP-Compaq Merger

HP's proposed buyout of Compaq appears in serious jeopardy of collapsing after HP's largest shareholder announced that it will join Hewlett family heirs in voting against the merger.

Hewlett-Packard Co.s proposed buyout of Compaq Computer Corp. appears in serious jeopardy of collapsing after HPs largest shareholder, the Packard family foundation, announced late Friday that it will join Hewlett family heirs in voting against the controversial $25 billion merger.

The 12-member board of the David & Lucille Packard Foundation, which controls about 10 percent of HPs shares, disclosed their decision after a meeting Friday in Palo Alto, Calif., at which they reviewed the findings of various consulting firms hired by the foundation, HP and the Hewlett family.

"After thorough study and analysis the board has preliminarily decided, on balance, that the best interests of the foundation would be better served by Hewlett-Packard not proceeding with the proposed transaction," foundation Chairman Susan Packard Orr said in a statement issued after the meeting,.

Orr is one of three daughters of the late David Packard that serve on the groups board.

Together, the Packard and Hewlett families control about 17 percent of HPs shares, analysts said.

Prior to Fridays action, analysts had speculated that HP-Compaq merger would be doomed should the Packard family join the Hewlett heirs in opposing the deal.

"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 market analyst Dan Niles with Lehman Brothers in San Francisco.

Following the foundations vote, Palo Alto-based HP and Compaq, of Houston, issued a joint statement saying that they remain committed to pursuing the merger.

"We are disappointed by the Packard foundations preliminary decision," the statement said. "Nevertheless, our responsibility to shareowners, customers and employees requires that we maintain a pragmatic view of the business and a focus on the future. Our firm commitment to this merger stems from our conviction that it will deliver the industry leadership and earnings growth our shareowners expect and our employees deserve."

Since the merger was first announced in early September, HPs decision and the leadership of its chairman and CEO, Carly Fiorina, have come under harsh criticism from investors and industry analysts.

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, particular 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 a statement Nov. 6.

In another setback, David Packard, son of the late co-founder of HP, 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.

The foundations chairman, 55-year-old Orr, 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 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 industry-wide 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 a total of 6,000 job cuts expected this year and potential more next year.

Compaq 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 in an effort to reduce operating costs, and has announced plans to cut 8,500 jobs this year.

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

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