Bid for Compaq gets a boost

Hewlett-Packard's efforts to acquire Compaq get new life when a key research firm advises investors to support the deal.

©Associated Press
March 6, 2002

SAN JOSE, Calif. -- An 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 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 recommendation 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 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. 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 that the deal will happen.

Institutional Shareholder Services mainly advises large investors on matters of corporate governance, like proposals for the composition of corporate boards and shareholder voting procedures. It also issues recommendations on mergers, but its role has never been as potentially significant as in the Compaq merger.

That television cameras were clustered outside the suburban Washington offices of an investor advisory firm that few people had heard of a few months ago is but one of the curiosities of the battle for Hewlett-Packard's future.

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.

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.

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 options before deciding that buying Compaq was the best course.

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 a "significant shareholder representative" on its board.

-- Information from the New York Times was used in this report.

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