No Controversy at Compaq, Shareholders OK the Merger

All Compaq (CPQ Quote) shareholders in favor of a stock price that goes up, say "aye."

At a special meeting held in Houston on Wednesday, Compaq shareholders celebrated the end of voting on the computer maker's proposed merger with Hewlett-Packard (HWP Quote), currently valued around $21 billion. While a corresponding H-P event a day earlier featured protests, a heralded opponent and early management claims of victory, Compaq's wearied investors rubber-stamped the deal giving them a 6% premium for their shares and happily turned over their fate to a legendary technology power almost 2,000 miles away.

"I am gratified that Compaq shareholders have seen the power behind the merger of these two great technology companies and given the board of directors and management their resounding support," said CEO Michael Capellas in reaction to a 9-to-1 approval ratio in the final vote.

H-P had a much tougher audience, but even so on Tuesday CEO Carly Fiorina announced preliminary estimates that indicated the merger would go through. Capellas, who would be president of the combined entity and will likely be paid a hefty bonus for his part in the joining, praised the combination. "We continue to believe that this merger will rapidly accelerate our strategy, improve overall earnings power and provide increased value for customers, shareholders and employees," he said. "We are very close to making this merger a reality." Merger opponent Walter Hewlett insists that the vote was too close to call.

Capellas' promises are very appealing to Compaq shareholders. Capellas' ascension to the top office followed a downward spiral at the troubled company that thrust it into quarterly losses. In the second half of 1999 and into 2000, Capellas righted the ship. But starting with the holiday season of 2000, Compaq's revenue line started to lose its way. Compounded by a clampdown in IT spending, revenue fell 21% in 2001, from $42.4 billion to $33.5 billion. In 2001 H-P's revenue dropped a comparatively slim 7% from 2000. In 2001, Compaq's earnings fell 85% year over year, punctuated by a third-quarter Sept. 11-fueled dip back into losses. For its part, H-P saw a 49% drop in earnings.

Compaq's largest institutional investors, Capital Research & Management and Putnam Investment, both signaled they would vote in favor of the merger. Capital holds 3.73% of H-P shares and 4.65% of Compaq, while Putnam has 2.53% of H-P and 4.28% of Compaq. Indeed, while H-P shareholders have questioned the value of Compaq's low-end computing and midrange server businesses, Compaq holders have been enthusiastic about the deal.

Wall Street is much less excited, pushing Compaq shares down 10% since the merger was announced, and shaving 18% from H-P's stock price during that time. Employees should be at least a little nervous about the deal, which is expected to eliminate 10% of the two companies' workforce, or 15,000 employees.

Regardless, investors are willing to take a big risk to get a boost out of their Compaq shares. Never mind that Compaq investors have intimate knowledge of failed technology mergers after a half-cocked integration of DEC in the late 1990s that perhaps led Compaq to its current lows. Unlike a good proportion of H-P shareholders, Compaq investors are willing to take the risk.