All in the Family: Hewlett-Packard Deal on Life Support

Editor's Note: Jim Seymour's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Nov. 12 on RealMoney.

Things are getting pretty rattly in the proposed merger of Hewlett-Packard (HWP) and Compaq (CPQ). I'm not saying the wheels are falling off yet ... but increasingly it feels as if that's the next stage. This week may see the decisive moves.

You've no doubt seen or heard stories about the unhappiness with the deal among Bill Hewlett's and Dave Packard's heirs. At the end of last week, Walter Hewlett, Bill Hewlett's son and the most outspoken family member on the deal, announced that he had hired a proxy-solicitation firm to help him lead a fight against shareholder approval of the deal. (The merger must be approved by shareholders of both companies.) He's also said he'll be voting the Hewlett family's 5% or so of Hewlett-Packard's shares against the deal. (Those shares are held personally and by a family-controlled trust and foundation.)

Hewlett's actions are ominous for the deal, but not decisive. His position as a member of Hewlett-Packard's board of directors gives him some visibility and authority here -- and no doubt drives Hewlett-Packard's CEO Carly Fiorina crazy. The last thing she needs now, I'm sure she figures, is a son-of-a-founder board member publicly fighting the deal.

But the word from the other side of the company -- the Packard side -- is almost as ominous and could be definitive. David Packard Jr., son of the other founder, owns and controls about 1.3% of the company personally and through an institute he controls. He has joined his friend Walter Hewlett in opposing the deal and says he'll vote those shares against the merger as well.

Interesting, but still not decisive: Just 6.3% of the company's common stock is not going to kill the deal, but could make the difference in a close vote.

Packard Foundation Is Now Key

The real deal here is what the Packard Foundation does with its 10%-plus stake in the company. America's fourth-largest charitable foundation in terms of funds dispersed -- with 85% of its assets in nearly $10 billion of Hewlett-Packard common stock -- has to be concerned about the decline in the company's value since the deal was announced. Remember, too, that the foundation's directors have a fiduciary duty to protect the foundation assets. Nicey-nice and loyalty don't count here.

David Packard Jr. does not speak for the foundation, as both parties have made clear, but the foundation says it has hired advisers to help it evaluate the deal. And if it decides to vote "no" on the deal, we're talking about a highly visible, highly credible block of 16%-plus of Hewlett-Packard's total float, including the Hewlett-side shares, voting against the deal. That would be tough to overcome.

Credibility is a big issue here. Hewlett-Packard has always been a remarkably close family, as businesses go. Still, there are plenty of employees (many or most, shareholders themselves) who were on the payroll when the much-admired Hewlett and Packard were alive and active in the company. They respect the family and are likely to be swayed by the decisions of the Hewlett and Packard heirs.

Moreover, they are, in many cases, unhappy with Fiorina's efforts to disassemble the "old" Hewlett-Packard, reshape its culture and sell off what were long seen as central, highly valued businesses (for example, its test-and-measurement-devices lines).

That suggests to me that many employees' shares would be voted against the deal, too.

This is not to say that Fiorina and her Compaq counterpart Mike Capellas are alone in backing the deal. Famed venture capitalist Tom Perkins, a founder of top venture capital firm Klein Perkins Caufield & Byers as well as a Compaq director, has been out tub-thumping for the deal.

The Week That Was

This may be the decisive week for two reasons. First, Hewlett-Packard reports its fourth-quarter numbers Thursday. Fiorina said in August that she thought fourth-quarter revenue would top the third quarter's $10.1 billion. That guidance wasn't changed after Sept. 11.

If Hewlett-Packard hits her forecast, she'll buy a little credibility -- something she's casually dissipated in her 28 months at the helm. If not, count this deal as dead. The Packard Foundation and its advisers will likely look at those fourth-quarter numbers carefully as well, of course.

So, second, we may shortly hear their decision.

This is in a sense ironic: The fourth-quarter numbers will not reflect in any very substantial way the prospects of the possibly merged companies, but rather will be based much more on the eroding business climate, the eroding PC and peripherals markets and post-Sept. 11 corporate spending cutbacks.

But reality is reality. Those numbers have taken on an importance far beyond the numbers from any of Fiorina's earlier quarters at Hewlett-Packard or earlier at Lucent, where she was a successful, high-profile CFO.

Investment Advice

I wouldn't be long Hewlett-Packard going into Thursday's call. Even if the numbers are good (unlikely), beating the $10.1 billion guidance (even less likely), the negative impressions of this merger hang heavy over the stock, and it's unlikely to see a nice uptick. Further erosion seems much more likely.

On the Compaq side, stay away from such a confused situation for now. Perversely, though I think the marriage with Hewlett-Packard (and the disappearance of the Compaq brand name) would be very bad for Compaq shareholders, I worry that after the confused two months since the deal was announced, Compaq will have enormous problems regaining any momentum in either consumer or corporate markets. Some of its businesses are strong -- servers and storage, and maybe consulting -- but Compaq is widely seen as dead in the water, pitching and tossing with the tides of uncertainty, already a victim of the merger.

When things get this rattly -- and when all the forces seem to be lining up against a deal -- stay away. It's just too risky.