PALO ALTO — The family and foundation of Hewlett-Packard Co. co-founder William Hewlett said Tuesday they will vote their 5 percent stake against the proposed takeover of Compaq Computer Corp., revealing divisions that could threaten the $21 billion deal.
Walter B. Hewlett, Hewlett’s son and a member of the HP board, said the company can create more value for shareholders without adding Compaq. Hewlett said the deal would give HP too much exposure to the struggling personal computer industry and dilute its profitable printer business.
“Given the lack of stockholder benefits, I believe the extensive integration risks associated with this transaction are not worth taking,” Hewlett said in a statement on behalf of him, his sisters Eleanor Hewlett Gimon and Mary Hewlett Jaffe, and the family’s charitable foundation.
It was not immediately clear how many other HP board members shared that position. Hewlett voted for the acquisition when the board originally gave chief executive Carly Fiorina the green light to pursue the deal.
Potentially more important, the Packard family foundation — which owns 10 percent of HP’s stock — has not decided whether to support the deal.
Robert Stephens, a son-in-law of HP co-founder David Packard and a member of the foundation’s board, said the organization has hired advisers to help determine its decision.
“It has tremendous consequences for us,” Stephens said, adding that the Packards are not discussing the issue with the Hewletts.
For many of the reasons Hewlett cited, the deal has been widely unpopular on Wall Street ever since it was announced on Labor Day, chopping the value of the deal down from the original $25 billion.
Shares of HP jumped 17 percent, or $2.92, to close at $19.81 Tuesday on the New York Stock Exchange. Compaq shares fell 5.5 percent, or 49 cents, to close at $8.50.
“We were absolutely very pleased by today’s announcement,” said David Katz, president of Matrix Asset Advisors, which has large stakes in HP and Compaq and opposes the acquisition. “We think it opens the door for the board to reconsider the transaction.”
Dates for shareholder votes on the deal have not been announced. HP said that it will register a prospectus about the proposed acquisition with the Securities and Exchange Commission this week and that the filing “will serve as the basis for thoughtful shareowner evaluation.”
“While we regret very much the Hewlett family’s decision, we are not surprised,” the company said in a statement. “The HP board of directors and HP and Compaq remain fully committed to the merger and expect shareholder approval.”
HP and Compaq declined to comment further.
William Hewlett and David Packard founded HP in a Palo Alto garage in 1938 with $538 of their own money and built it into one of the world’s premier technology companies. Hewlett died in January; Packard died in 1996.
Fiorina became the first outsider to lead the company when she was hired away from Lucent Technologies in 1999. Although she has come under intense criticism this year as HP’s profits and sales have fallen, the board had at least publicly appeared unified behind her strategy until Tuesday.
“I think symbolically, it’s a blow to the deal and to the confidence of industry observers and other shareholders, many of whom take their cue from that pretty big stake,” said Eric Rocco, a Gartner Dataquest vice president who has studied the proposed acquisition.
Merrill Lynch analyst Tom Kraemer noted that the acquisition would require a majority of shares voted — not of the total amount of shares outstanding. If the Hewletts and Packards together voted it down, “it could make it substantially more difficult for the merger to go through,” Kraemer wrote in a research note.
Walter Hewlett said Compaq has too much exposure in lower-priced servers and in support services, and he believes HP is better off concentrating on higher-end servers and outsourcing and consulting.
He added that the “merger would distract Hewlett-Packard management and the rest of the Hewlett-Packard employees from concentrating on areas in which Hewlett-Packard excels and should be expanding.”
“The uncertainty created by the merger could cause existing and potential customers to delay orders or to purchase products from Hewlett-Packard’s competitors,” he said.
Rocco of Gartner Dataquest said he agrees it would be very difficult to combine HP’s and Compaq’s massive organizations, but said it has the chance of being successful long term, in particular making HP better at providing high-tech services.
“The management of both companies can make this work if given the opportunity,” he said. “Certainly there’s something to be said for trying to create the largest player in several segments of the (information-technology) industry, where size and scale does matter.”
AP Technology Writer May Wong contributed to this report.
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