Features

SAN JOSE — A highly influential proxy research firm recommended Tuesday that Hewlett-Packard Co. investors approve the proposed $22 billion acquisition of Compaq Computer Corp., giving new life to HP’s efforts to complete the hotly contested deal. 

After reviewing thousands of documents and listening to personal appeals from HP executives and merger opponent Walter Hewlett, Institutional Shareholder Services of Rockville, Md., said the deal could be an excellent long-term move despite its sizable risks. 

The ISS decision was crucial because more than 20 percent of HP shares, including those held by the Hewlett and Packard families and their foundations, have lined up against the deal, with only about 5 percent in the company’s camp. 

A negative report from ISS widely would have been seen as a fatal blow for the deal. Analysts had said a positive report would leave HP with a 50-50 chance of winning the fight. 

HP chairwoman and chief executive Carly Fiorina acknowledged that the ISS recommendation does not “seal the deal,” but said she was “gratified.” 

“Their process was exceptionally thorough and professional,” she said in a conference call with reporters. “We think this is a significant vote of confidence. ... The momentum is clearly moving in our favor.” 

Walter Hewlett immediately blasted the report, saying ISS “missed the point.” In a statement, Hewlett said he still expects to win the proxy fight because many investors independently evaluating the deal agree with his arguments. 

Some analysts and HP’s chief financial officer have estimated that as many as 40 percent of HP shares are held by investors who either will follow ISS’s advice or will be in some way influenced by the report. 

Other analysts put the total much lower, because this deal is so vigorously contested that most money managers will weigh a variety of factors in deciding how to vote. Fiorina declined to speculate on what percentage of shares will be affected. 

At a minimum, ISS could control about 10 percent of HP shares because some investors have ISS vote for them. Barclays Global Investors, which owns 3.1 percent of HP stock and is the company’s fourth-largest investor, has put its votes in ISS’s hands because Barclays chief Patricia Dunn sits on HP’s board. 

HP shares rose 5 cents to $20.60 Tuesday on the New York Stock Exchange before the ISS report but fell 2.7 percent to $20.05 in after-hours trading. Compaq shares dropped 7 cents to $10.58 in regular trading but rose 5 percent to $11.12 in the extended session. 

The narrowing gap in the companies’ stock prices indicates increasing confidence on Wall Street the deal will happen. 

With HP and Walter Hewlett locked for months in a bruising, political-style campaign for shareholder support, the ISS vote loomed much like a primary election. The campaign is expected to only intensify as the March 19 shareholder vote gets closer. 

“ISS clearly has a predisposition to support management and makes a general presumption that boards do the right thing,” Walter Hewlett said in his statement. “In the post-Enron world, it is obvious that these assumptions need to be questioned. This is especially the case here.” 

Compaq’s chairman and chief executive, Michael Capellas, who would be No. 2 in the new HP, said the ISS recommendation marked “an important milestone in the merger process.” 

HP and Compaq believe that together they will become a dominant force in several growing technology markets, especially corporate computing and high-tech services, while improving the economics of their struggling personal computer divisions and generating $2.5 billion in cost savings. 

Hewlett and other merger opponents worry that absorbing Compaq into HP would be a difficult and distracting process, and that the acquisition would dramatically increase HP’s exposure to the slumping PC business at the expense of the profitable printing and digital imaging division. 

The ISS report, written by Ram Kumar, the firm’s assistant director of U.S. research, closely examined both sides’ arguments and the corporate governance process involved in planning the deal. ISS also consulted with HP’s bankers, Hewlett’s advisers and Fiorina’s predecessor, Lew Platt, who opposes the deal. 

Although ISS said “we share Mr. Hewlett’s belief that integration is one of the most daunting problems facing a combined HP-Compaq,” it concluded the companies appear up to the task. 

ISS also supported the HP board’s contention that it had considered a slew of other strategic options before deciding that buying Compaq was the best course. 

Hewlett has challenged that notion and offered a simpler, “focus and execute” strategy centered more on the printing business. 

“We believe that the Compaq merger provides a better means of maximizing long-term value by exploiting all of HP’s assets rather than just a single ‘crown jewel,”’ ISS said. 

ISS did agree with Hewlett, however, that the company should have disclosed the lavish pay packages that have been considered for Fiorina and Capellas. ISS said the issue indicates HP needs Hewlett or some other “significant shareholder representative” on its board. 

——— 

On the Net: 

Pro-merger site: http://www.votethehpway.com 

Anti-merger site: http://www.votenohpcompaq.com