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Sat, Mar 16, 2002 - Page 19 News List

HP-Compaq drama like an episode of `Dallas'

DPA , SAN FRANCISCO

If the creative geniuses behind Dallas and Dynasty ever devise a Silicon Valley soap opera, the HP-Compaq drama now playing out in corporate boardrooms would provide a perfect plot.

The battle over the largest high-tech merger in history has all the ingredients of a blockbuster -- compelling characters with suspect motives locked in fateful battle, huge fortunes to be won or lost, fantastic empires to rise or fall, a decisive clash between tradition and modernity, and the dramatic stockholder referendum that will decide everything is too close to call.

On Thursday, just days before the decisive March 19 and 20 shareholder vote on the US$22 billion merger of Hewlett Packard and Compaq, both sides were proclaiming themselves confident of victory as they moved to shore up critical support from institutional shareholders.

At stake are the futures of two of the most venerable brands in the technology world -- once mighty companies that were hammered hard in the tech slowdown, which highlighted their vulnerability to fast-changing economic and technological conditions.

Both companies have been outclassed in PC retailing by Dell, which has managed to keep prices low and profits high with an innovative supply and manufacturing chain. IBM is easily more powerful in the lucrative area of corporate services. In servers, both lag behind Sun Microsystems, and in software neither company is anything more than a bit player.

Whatever strength HP has is largely reliant on its printing and imaging business, a somewhat dowdy arena for a high-tech giant in this digital age, especially since so much of the revenue relies on selling nothing more glamourous than ink cartridges.

The deal is the love child of the most powerful woman in American business, HP chief executive Carly Fiorina, whose mix of media savvy soundbites, new age business models and ruthless commitment to reorganization has made her a heroine to some but an evil schemer to others. She has found a willing partner in Michael Capellas, the bookish head of Compaq; both chief executives stand to make US$115 million if the deal goes through.

Fiorina claims that the merger, though risky, is the only way to save HP's stature as a leading technology company. It will help the new company cut costs and offer more products and services, catapulting it to a position from which it will be well able to launch credible challenges to Dell, IBM and other industry leaders.

The opposition is led by the Hewlett and Packard families -- descendants of the legendary duo who founded the company in a garage in the late 1930s and laid the foundations of Silicon Valley. The family still control 18 percent of HP's voting stock.

Walter Hewlett, the academic, musician and long-time board member, has rallied opposition to the deal, claiming that by diluting the power of HP's cash cow, the imaging and printing division, the merger could prove disastrous. He also notes that previous high-tech mergers have all encountered problems -- and none compared in scope to the challenge of integrating a combined work force of 145,000 employees in 160 countries.

He argues that a majority of HP workers oppose the deal, that the merger will require 15,000 lay offs, and that it is a betrayal of the benevolent corporate management culture that has become known as the HP way.

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