H-P Foundation Votes Against Compaq Merger

The move by the charitable foundation, which owns 10% of Hewlett-Packard, could scuttle the marriage.
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The David and Lucile Packard Foundation voted Friday not to support



acquisition of




The charity, whose board met for the vote in Los Altos, Calif., holds 10% of Hewlett-Packard's stock. A dissenting opinion on the merger of the two companies weighs heavily against the chances of H-P CEO Carly Fiorina's ability to consummate the pairing.

"Well, another big merger blows up," remarked Lehman Brothers analyst Dan Niles after the announcement. "This thing's pretty much over. H-P will take it to a shareholder vote in January, but the deal is pretty much on life support." As for what the trouble means for CEO Carly Fiorina, Niles told


that if the board and Fiorina "don't support each other, they should part ways." Niles rates Compaq buy, and his firm has done banking for the computer maker.

Sanford Bernstein's Toni Sacconaghi argued in a note to clients Friday that "the Foundation's vote will ultimately determine the outcome of the merger." He believes that Hewlett-Packard has more earnings stability on its own, making a negative vote a "safer" bet for risk-averse investors such as the Packard Foundation. Sacconaghi rates H-P market perform, and his firm has not done underwriting for it.

The analyst joined many onlookers who thought the foundation wouldn't vote in Friday's meeting, but would instead go over a presentation by hired consultants Booz Allen & Hamilton on the merits of the transaction. Hewlett-Packard's entire shareholder base is slated to vote on the acquisition in January.

In after-hours trading, Hewlett-Packard was up 6% to $25 on Instinet, while Compaq fell 10% to $11.32.

In a statement Nov. 7, the Hewlett family voiced complaints about the merger and announced that three family members, the William R. Hewlett Revocable Trust and the William and Flora Hewlett Foundation would not support the deal. The Hewlett family controls 5% of H-P's stock.

Walter Hewlett argued that the addition of Compaq would distract Hewlett-Packard from its printer and imaging businesses, and weight the company toward the difficult low-end PC and server markets.

David Packard similarly voiced his concerns as an individual shareholder, but the computer giant's board quickly countered with its continued affirmation that the Compaq acquisition was the right move for the company.

Additionally, David Packard has individually opposed Hewlett-Packard's acquisition of Compaq on the grounds that the massive layoffs involved would violate the tradition of employee relations pioneered by the company's founders, which is known as the "HP Way."

In 2001's slump, Fiorina has started layoffs that have lopped 7,000 employees from the H-P family. Projections for the merged company highlight 15,000 more workers who would be let go in the merging of the computing companies.

Hewlett-Packard and Compaq unveiled the proposed acquisition on Sept. 4, outlining a $25 billion deal that would combine two ailing companies and create $2.5 billion in immediate savings. Neither company has performed well in 2001. H-P was forced to warn about lower-than-expected earnings no fewer than six times in the first three quarters of 2001, sparking speculation that Fiorina's days at Hewlett-Packard's helm were numbered, though the company managed to post a stronger fourth quarter.

Meanwhile, Compaq is in the midst of a two-year restructuring meant to reduce the company's reliance on the thinning margins of the sub-$1,000 personal computer market.

As the stock market swooned in September, the value of the deal slipped to $16 billion, but has come back up to $24.9 billion in the recent tech-stock rally.