On eve of HP-Compaq merger vote, a contest too close to call

By Brian Bergstein, The Associated Press
Saturday March 16, 2002

PALO ALTO — Hewlett-Packard Co. chief Carly Fiorina told her 88,000 employees in a November e-mail that talk of a feud between her and sons of the company’s founders was merely “lazy reporting” by journalists trying to sell newspapers. 

“It is far easier to dream up a feud that doesn’t exist than to research complex, far-reaching, industry-changing business concepts,” she wrote. 

Perhaps Fiorina was right — there was no feud. Because “feud” would be a huge understatement for the all-out war that has raged the last five months over HP’s plans to buy Compaq Computer Corp. in a stock deal now valued at about $21 billion. 

The bickering should end Tuesday, the deadline for HP’s 900,000 stockholders to send in cards indicating how they stand. Hundreds of shareholders also are expected to come to a Silicon Valley auditorium to vote their stakes and speak their minds. 

The contest appears too close to call. While Compaq shareholders are expected to approve the deal Wednesday, HP results might not be known for weeks because independent proxy counters will painstakingly verify each vote. Both sides say early tallies of proxies already mailed in show the vote going their way. 

Whatever happens, this deal will forever change HP, a proud institution two engineers launched in a Palo Alto garage 64 years ago. 

Even longtime business observers have been stunned by the tenor of the proxy fight, which has matched Fiorina and her management team against dissident director Walter Hewlett and his advisers, who are intent on blocking what would be one of the world’s biggest high-tech mergers. The deal is also opposed by David Woodley Packard and other heirs of the late founders. 

Each side has spent tens of millions of dollars on newspaper and Internet ads, road trips for meetings with investors, legal fees and public relations blitzes. 

“Carly is a warrior,” said HP board member Patricia Dunn, chief of Barclays Global Investors. “She’s been very resilient.” 

Not everyone sees that as a plus. 

“If she was as enthusiastic and paid as much attention to running the business as opposed to doing the deal, Hewlett-Packard shareholders would be in a lot better shape,” said David Katz, president of Matrix Asset Advisors, which will vote its HP and Compaq stock against the acquisition. 

HP and Hewlett sometimes talked past each other, failing to address specific issues. Each accused the other of violating tenets of corporate governance: Hewlett blasted HP for allegedly hiding lucrative pay packages waiting for Fiorina and Compaq’s chief, Michael Capellas; HP slammed Hewlett for missing three key board meetings. 

“In my personal opinion, HP’s image has been tarnished by this proxy fight,” said Paul McGuckin, a Gartner Inc. research director who supports the merger. 

“HP used to have an image of taking the high road, of not engaging in dirty tactics, of wanting to be a trusted adviser. After slinging mud with Walter Hewlett the last two months, HP doesn’t look like a company that takes the high road.” 

There are more tangible concerns as well. 

For one, if the deal is rejected, HP’s and Compaq’s leaders have to skulk back to their stand-alone companies — which they have spent six months describing as desperately in need of overhauls the mega-merger could provide. Fiorina would likely leave HP; Capellas would probably stay with Compaq. 

But the picture could get even muddier if the deal does pass. 

HP, a $45 billion seller of printers, computers, servers, digital cameras and high-tech services, believes that with Houston-based Compaq and its business-computing expertise on board, it will be able to dramatically improve the end-to-end packages it offers. 

Still, many customers have told independent surveys they worry they’ll be neglected while HP and Compaq figure out how to work together. 

On the other hand, some big Compaq and HP clients have offered high praise for the deal. And the companies contend customers have nothing to fear because the merger is being planned better than any in memory. 

Perhaps a bigger worry is that HP’s employees — the people who would turn Fiorina’s home-run strategy into reality — still need convincing. 

Though HP says internal surveys show that about two-thirds of its work force supports the merger, independent polls of employees at three company sites by the well-regarded Field Research Corp. found the opposite results. 

Fiorina, brought in to shake up HP in 1999, tends to provoke strong opinions. 

Many employees say she has reinvigorated a staid, decentralized Gray Lady of Silicon Valley. But others say she is imperious, too flashy for HP’s engineering culture, too cold about last year’s 7,000 layoffs and the 15,000 more that would be needed if the deal goes through. 

Even so, it’s unclear how much whatever employee hostility to the deal might exist would hamper HP as it tries the complex integration of Compaq. 

For example, a 22-year HP veteran who hates the deal says that even if only 35 percent of employees agree with him — as the most optimistic surveys suggest — “it’s the end of HP” because “you need everybody on board.” 

But in the next breath, the same engineer, who spoke on condition of anonymity, says he expects that even the deal’s biggest opponents would work hard at making it successful if it does go through. 

“A lot of people say, ‘Well, we’ll do our best — that’s the HP way.”’