War of Words Between HP, Heirs Intensifies

HP on Wednesday lashed back at opponents of its proposal to buy Compaq saying their arguments are based on "faulty financial assumptions."

Hewlett-Packard Co. lashed back at Walter Hewlett, the leading opponent of its proposed merger with Compaq Computer Corp., in a statement sent to investors Wednesday, belittling an earlier report by the HP heir as being based on "faulty financial assumptions."

The report comes one day after Hewletts attorney accused an HP board member of threatening a management walkout should the deal be rejected, a claim HPs attorney denied.

In an effort to salvage the controversial $25 billion deal opposed by Hewlett and Packard family heirs, who together control about 17 percent of HP stock, the company today sent shareholders a detailed analysis of the merger filled with charts and graphs designed to outline the benefits of combing the assets of the two computer companies.

In the report, a copy of which was also filed with the Securities Exchange Commission, HP took issue with previous arguments against the merger released by Hewlett, in which he characterized the deal as a misguided attempt to save the struggling company.

Overall, Hewlett contends the merger would increase HPs exposure to a slumping PC market, dilute the focus on its profitable printer business, distract management, undermine company morale and cost the company, and investors, billions of dollars to completely integrate the two businesses.

In contrast, HP argued that the merger would result in cost savings of $2.5 billion annually and create a far more formidable competitor thats able to leverage a broader array of products and services.

"We believe his recent opposition to the merger is based on a static and narrow view of HP and the industry, selectively ignores the synergies of this transaction, relies on faulty financial assumptions and analyses, and offers no alternatives to address HPs challenges and opportunities," HP said in a letter accompanying the report.

In addition, the company warned investors that opposition to the deal by Hewlett and Packard family members may be clouded by personal biases.

In an apparent attempt to undermine the heirs authority to speak on behalf of the companys co-founders, HP quoted the late David Packard assertion that the company must change to remain competitive.

"In the fields of advanced and rapidly changing technologies, to remain static is to lose ground," Packard is quoted as saying.

Wednesdays action by HP came one day after an attorney representing Hewlett accused a company executive of threatening shareholders to approve the deal.

Hewlett reportedly objected to a quote attributed to HP director Richard Hackborn in a story by The New York Times in which he said that shareholders ``will have to get a board and a management to fix HPs problems if the deal fails.

"This type of threat … is shocking," Hewletts attorney Stephen Neal said in a letter to HP attorney Larry Sonsini. "The threats raise serious questions about the directors compliance with their fiduciary duties and clearly are not in the best interests of shareholders."

In a response issued Wednesday, Sonsini called the assertions "incorrect and misleading."

Despite mounting opposition to the merger from some of HPs largest shareholders, the company last week vowed to proceed with the deal.

"There is no thinking of calling off the merger," said Webb McKinney, who heads HPs merger acquisition team, in a conference call with reporters.

Efforts to sway shareholders on the merger will likely continue until late January or February when HP and Compaq have tentatively announced theyll put the issue to a vote.