Restructuring Deal Could Save HP-Compaq Merger

The Packard family foundation's rejection of HP's proposed merger with Compaq doesn't necessarily kill the deal, but HP executives are going to have to find a way to make it more palatable to their shareholders.

The Packard family foundations rejection Friday of Hewlett-Packard Co.s proposed merger with Compaq Computer Corp. doesnt necessarily kill the deal, but HP executives are going to have to find a way to make it more palatable to their shareholders, according to analysts.

One way may be to restructure their agreement with Compaq to make the merger less focused on PCs.

While opposition to the merger by the David and Lucile Packard Foundation, which controls 10 percent of HP stock, could ultimately doom the deal, a brief statement issued by the foundations chairman left open the possibility that the board could change its mind.

"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 the statement issued Friday, following a lengthy meeting of the organization.

With Orr calling the foundation vote preliminary, and HP and Compaq soon after issuing a joint statement saying that they remain committed to the deal, its too early to say the mergers dead, analysts said.

"This isnt over," said Andrew Neff, a market analyst with Bear Stearns, in New York. "I would assume that HP would try to create a more enterprise-focused deal, with less exposure to PCs. Sort of the greatest hits of HP with the choice parts of Digital Equipment," which Compaq acquired in 1996.

Adding to speculation that HP and Compaq might restructure the deal, which was first announced in September, is the fact that the two computer makers have yet to submit the deal for review by European regulators.

"Whats raising peoples questions is, why havent they filed with the European Commission?" Neff said. "The feeling I get is that maybe theyre going to change things around."

In light of the Packard foundations vote, and last months declaration by the Hewlett family that it plans to vote the more than 5 percent of HP shares it controls against the merger, executives pushing the merger have little choice but to try to restructure the deal, another analyst said.

"Certainly theyre going to try to do that, because thats the only way youre going to get it done at this point," said Rob Enderle, an industry analyst for the Giga Information Group, in San Jose, Calif. "Whether theyll be successful or not, who knows."

George Elling, a market analyst with, in New York, said that while HP executives are tight-lipped about what they may do next, a possible reworking of the deal is likely on the table.

"I talked to the management Friday, and they wouldnt play their next card, but Im sure theyre looking into it," he said. "I think the foundation left the door open, but only a crack. I would assume that they told (HP Chairman and CEO) Carly (Fiorina), If you would be willing to do X, then we would rethink it. But thats part of the equation we just dont know right now."

Whether the deal is reworked or not, Enderle said, executives of HP and Compaq are going to have to do a better job of selling the merger to investors and customers.

"They ought to be out being very visible and vocal about arguing the advantages of this merger," he said. "But for most of this, the companies have been relatively dark. Theyve issued press releases, but other than that, they havent been that visible."

In particular, he was critical of HP Fiorinas apparent failure to lobby harder for the merger.

"Carly really hasnt been out front with this," Enderle said. "Not only have most of the reporters Ive spoken with not been able to talk to Carly, but they havent been able to talk to the people that talk to Carly."

But Elling countered that the embattled chief executive and her management team have been on the offensive.

"I think she has pushed pretty hard, but maybe now shell have to redouble her efforts," Elling said. "Ive had Carly meet with our clients. Shes very articulate and makes a very strong case. I had Bob Wayman (HPs chief financial officer) in on a conference call a week ago with major institutions; we had 192 clients on the line. So clearly theyre not sleeping."

Much of the opposition to the merger has centered on criticism that HP, of Palo Alto, Calif., and Houston-based Compaq have too much in common, with the companies drawing much of their revenues from the sales of relatively similar servers and PCs. As a result of melding the two operations and eliminating overlapping products, critics contend, HP would likely alienate and lose customers it had hoped to gain in the deal.

In addition, HP shareholders have criticized Compaqs reliance on PC sales for much of its revenue. While sales of personal computers fueled Compaqs tremendous growth during 1980s and 1990s, PCs are now viewed as undesirable, low-profit commodities.

The HP-Compaq deal "would dramatically increase Hewlett-Packards exposure to the unattractive PC business and dilute current stockholders interest in Hewlett-Packards profitable printer business," HP board member Walter Hewlett said in a statement issued last month announcing the Hewlett familys opposition to the deal.

But despite their publicized objections to the deal, market analyst Neff said HP and Compaq may yet have time to restructure their merger proposal in a way that would appease HPs heirs.

"Reading into the comments of the various parties, one could see some wiggle room in the various positions whereby the merger could get the blessing of the families if the terms were different," Neff said, although he admitted such a solution "may be a long shot."