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European Regulators Approve H-P-Compaq Merger

The U.S. government isn't expected to stand in the way, but shareholders still have to vote.

Updated from 2:59 p.m. EST

European regulators won't stand in the way of the






merger, but the companies still have to convince shareholders to back the deal.

The European Commission approved H-P's acquisition of Compaq without imposing any conditions. "A careful analysis of the merger ... and of the competitive forces in the markets concerned has shown that H-P would not be in a position to increase prices and that consumers would continue to benefit from sufficient choice and innovation,'' the commission said in a statement Thursday.

It's a positive endorsement, but obstacles remain that could prevent the companies from completing the deal, which was originally valued at about $25 billion. U.S. regulators must still give their stamp of approval, though government agencies on this side of the Atlantic aren't expected to block the merger. More importantly, shareholders have to get behind the proposal.


While the two founding families of H-P, who own a combined 18% of the company, continue to oppose the merger, some large institutional shareholders seem to be coming around in support of H-P and Compaq CEOs Carly Fiorina and Michael Capellas. Banc of America analyst Joel Wagonfield estimates that some 67% of H-P's institutional shareholders will need to vote in favor of the merger in order for it to go through.

"It's still an uphill battle, but they do appear to be gaining some momentum," he said.

Support Levels

At a technology conference last week, Wagonfield spoke to several institutional H-P shareholders, who he said seem more willing to examine the deal in terms of the business fundamentals and combined strengths than before. In an interview with

The Wall Street Journal

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, H-P Chief Financial Officer Bob Wayman also said that his conversations with institutional shareholders suggest they are becoming more supportive of the merger.

"The fact that time has lapsed has probably benefited the companies, as they have been able to get out in front of shareholders and pitch the deal more eloquently than they originally could," Wagonfield said. When the companies first announced their agreement last September, investors gave it a big thumbs-down, and shares of both companies dropped precipitously. Since then, Wayman has met with numerous shareholders and will continue to do so in the next several weeks.

No date has been set for a shareholder vote, but analysts said a tally could take place as soon as March. In the meantime, a recommendation from Institutional Shareholder Services, a firm that provides advice to institutional investor clients about how to vote on shareholder issues, could be crucial to approval, said Needham analyst Charles Wolf.

"If that group recommends voting in favor of the merger, it would raise the chances to 50% or more of it going through," he said. "If they vote against it, the deal is dead, zero." A lot of institutional shareholders, particularly index funds, rely heavily on ISS for advice. While the recommendations of ISS don't have to be followed, they tend to be influential.

ISS clients probably hold roughly 20% of H-P's shares, according to Wolf, who expects the proxy firm to announce its decision in February.

Barclays Bank


Putnam Investment Management


Vanguard Group

are among the biggest H-P shareholders who are also ISS clients. Compaq shareholders probably won't put up much of a fight because they'll receive a premium if the deal goes through. Based on Compaq's current price, the premium would amount to about a 13% markup.

Compaq helped its case by reporting

strong fourth-quarter earnings and upbeat comments about 2002. Compaq's shares have risen 68% since Sept. 21, putting them just pennies from where they were right before the deal was announced.

In recent trading, shares of Hewlett-Packard were down 2 cents to $21.94, and Compaq was up 32 cents to $12.31.