Shortly after Walter Hewlett declared in November that he would oppose Hewlett-Packard's planned purchase of Compaq Computer, he traveled to the East Coast. The fierce proxy battle to decide Hewlett-Packard's future was not yet under way, and Hewlett met privately with a few Wall Street investors and journalists to explain his stance. Hewlett made no disparaging remarks about Carleton Fiorina, the chief executive of HP and the leading proponent of the Compaq merger. He even suggested that it would be fine with him if she stayed on if the deal was rejected. His stand, Hewlett said, was one of principle, nothing personal.
A week later, in her office in Palo Alto, California, Fiorina took the same view. Citing support from the boards of both HP and Compaq, she said, "this isn't about me."
PHOTO: NY TIMES
But in the three-month run-up to the shareholder vote on Tuesday, the proxy contest at Hewlett-Packard has indeed escalated into something personal, even vituperative. The level of personal acrimony, and the US$100 million-plus cost, is making this fight a proxy campaign like no other.
With just two days left for a final barrage of newspaper advertisements, mailings, faxes, telephone calls and face-to-face meetings intended to sway undecided investors, all pretense of civility has been cast aside.
"I don't believe Carly Fiorina will survive as chief executive if this transaction is turned down," Hewlett said last week. "This time we don't want someone learning on the job" -- an allusion to the fact that Fiorina had not been a chief executive before she came to Hewlett-Packard in 1999.
Proxy campaign
The charges and countercharges became more pointed and personal as the proxy campaign progressed. Among the most vivid: Hewlett-Packard dismissed Walter Hewlett as "a musician and an academic," questioning his credibility and suggesting he was motivated more by emotion than reason. And Walter Hewlett released boardroom documents intended to portray Fiorina as both greedy and duplicitous.
Both Fiorina and Hewlett, according to friends and colleagues, have been surprised and at times wounded by the personalization of the proxy fight. Yet their own tactics have largely dictated the character of the campaign.
The fight is about money, of course, and shareholder value. But the vote really hinges on two issues: whose vision of Hewlett-Packard's future is more convincing and who merits shareholders' trust.
The poll will also be a referendum on Fiorina's leadership. She arrived amid high expectations in July 1999, tapped by the board as a forceful, young outsider and given a mandate to revitalize Hewlett-Packard, a corporate icon in Silicon Valley that seemed to have become sluggish and insular. Fiorina had been a top executive at Lucent Technologies, the equipment-making unit spun off from AT&T, which was thriving at the time.
Taking over at Hewlett-Packard was going to be a daunting challenge. But Fiorina, who is 47, had risen far and fast. She described her career and her decision to go after the Hewlett-Packard job most eloquently at the Stanford University commencement last year.
In her address, Fiorina, a Stanford graduate, recalled that when she dropped out of law school, she began her career in business at a real estate firm, just across the street from Hewlett-Packard's headquarters. "I had a title," she said. "It was not VP. It was receptionist. I answered the phones. I typed. I filed." Yet even at that level, she found business satisfying. "I liked commerce -- the pace of it, the people of it, the pragmatic problem-solving of it."
For her final job interview with the Hewlett-Packard board in 1999, Fiorina told students, she arrived early and parked in the lot of that real estate firm. "I thought about the uphill battle that lay ahead if I took the CEO job at HP," she said. It was a job, she knew, that would come with "a fair bit of scrutiny and criticism."
In becoming CEO, Fiorina walked into a situation that ensured she would confront more scrutiny and criticism than most new chief executives. She was asked to shake up and set a new course for a company with problems -- but not one in a tailspin, as was IBM when Louis Gerstner Jr. took over in 1993. She replaced a chief executive, Lewis Platt, who may not have been as dynamic and effective a leader as the company's activist board wanted, but who was a 33-year company veteran, liked and admired by the rank-and-file.
Fiorina was an outsider in a company of home-grown executives. She was a professional manager in a company with an egalitarian engineering culture, dating back to its founding in 1938, by two ambitious young Stanford engineers, William Hewlett and David Packard. And she was a woman, the highest-ranking female executive in America, in an industry where women are particularly scarce at the top.
Double standard
Her high profile and the rich pay package required to lure her from Lucent -- mostly stock once valued as high as US$85 million, though now at about US$35 million -- grated on traditionalists in the company. It all contributed to a general image of Fiorina as aloof, as fond of corporate luxury and as a practitioner of a command-and-control style of management.
Some of the things said about Fiorina are the Silicon Valley equivalent of urban legends. One is that she always travels with an entourage, including a hairdresser. No, say friends and colleagues, she has her hair cut at a place in a Stanford shopping center and has no traveling hairdresser. At home, they add, Fiorina does her own laundry and own grocery shopping. She drives herself to work, unless she gets a ride from her husband, Frank Fiorina, a retired AT&T manager.
Other stories about her lush corporate lifestyle have elements of truth but are not remarkable by the standards of most executives. Under Fiorina, Hewlett-Packard did acquire two Gulfstream IV jets, capable of flying overseas, and two smaller jets were replaced. The company has also leased another smaller jet. Still, the company has had a corporate fleet for decades, and under Fiorina the number of planes has simply gone from four to five.
"Why do people comment on my flying on a corporate jet when virtually every other chief executive in Silicon Valley does the same?" she once replied with irritation.
In recent years, Hewlett-Packard has not adapted as quickly to the rise of Internet technologies as its rivals, including IBM, Sun Microsystems and Dell Computer. After she arrived, Fiorina set aggressive growth targets and, at first, the company met them and Wall Street applauded. Soon, however, Hewlett-Packard began to fall short of earnings expectations. Last year, like the rest of the industry, the company suffered when corporate investments in computer technology plummeted. Fiorina trimmed the payroll, reduced travel spending and closed offices, but cost-cutting could not keep pace with the falloff in business. Hewlett-Packard's profits fell to US$624 million last year, from nearly US$3.6 billion in 2000, on sales of US$45 billion.
The unraveling of Lucent's fortunes in the last two years also gave some people second thoughts about Fiorina's record there, though there is no indication that she was responsible for its travails.
"That all gave people pause," said Steven Milunovich, an analyst at Merrill Lynch.
So when Hewlett-Packard announced its plan in early September to acquire Compaq, Wall Street was skeptical. Big mergers in the fast-moving computer industry rarely succeed, and the Compaq deal, an all-stock transaction valued at US$25 billion when it was announced on Sept. 3, would be the largest in computing history. And by adding Compaq, Hewlett-Packard was increasing its stake in the perilous personal computer market, where competition is fierce and profits scant. Hewlett-Packard's share price dropped 18 percent on the day of the announcement.
Silicon valley's reaction
The move also surprised Silicon Valley and confirmed suspicions among its technology elite about Fiorina. The merger, they said, showed the instincts of a professional manager, not a technologist. "We were all kind of scratching our heads out here," said Roger McNamee, general partner of Integral Capital Partners, an investment firm in Menlo Park, California. "I've never seen a technology problem that became easier by making it bigger."
Fiorina disagreed. "There are certainly more popular things I could be doing," she said last week. "But this is the best thing for HP, so, despite everything, this is ultimately worth doing."
Fiorina said that she was not surprised by the initial skepticism of investors and that Hewlett-Packard and Compaq had intended to begin a lengthy campaign of persuasion. But that effort was postponed after the terrorist attacks of Sept. 11. On Nov. 6, Walter Hewlett announced that he opposed the Compaq merger and would vote his shares and those of his family foundation against the deal.
The proxy battle began in earnest on Friday, Dec. 7. That day, the David and Lucile Packard Foundation -- the largest Hewlett-Packard shareholder, with 10.4 percent -- announced that it would also oppose the Compaq merger.
The decision of the Packard foundation meant that the heirs of both founders were united in opposition, including David Woodley Packard, head of the Packard Humanities Institute, a smaller foundation, who had earlier sided with Walter Hewlett. Together, they control 18 percent of Hewlett-Packard's shares.
Hewlett-Packard realized that it had to prepare for a real fight. That weekend, a senior member of the corporate staff called Daniel Burch, president of MacKenzie Partners, a New York proxy solicitor firm known for working on contested proxy campaigns. It was too late. He had already been signed up by Walter Hewlett.
The Hewlett-Packard camp badly needed to gain momentum. Throughout December and early January, the company ran a traditional campaign. Executives and board members traveled around the country to visit institutional shareholders individually or in small groups. Their basic points: combining with Compaq would give Hewlett-Packard the size and strength to fix its computer business, become a large services provider and cut costs. The new Hewlett-Packard, they contended, would emerge better able to compete against IBM for big corporate customers and against Dell in the personal computer business. From Compaq, Michael Capellas, the chief executive, also hit the road.
Heating up
But in late January, things began to heat up. In a letter to shareholders, Hewlett-Packard, responding to an attack on the deal, belittled Walter Hewlett's business acumen, calling him ``a musician and an academic.'' The personal jab incensed Hewlett's friends and allies in Silicon Valley -- and there are many.
"Carly Fiorina launched a marketing campaign to try to discredit the person leading the opposition," said James Gaither, a venture capitalist, a director of the Hewlett foundation and a former chairman of Stanford's board of trustees. "This isn't just Walter personally. This is a whole bunch of people. This is the last thing any of them wanted." Much of that network of support centers around Stanford, an incubator for Silicon Valley.
For decades, any major fund-raising campaign at the university began with Bill Hewlett and Dave Packard. Though they have died, the close family ties to Stanford live on. Last year, the Hewlett foundation, which is led by Walter Hewlett, donated US$400 million to Stanford. Susan Packard Orr, the chairwoman of the Packard foundation, is on the Stanford board of trustees.
Still, by pointing to Hewlett's lack of experience and demanding his alternative plan for the company, Fiorina and her team scored points. A seed of doubt had been planted in the minds of investors. What would happen to the company if Walter Hewlett actually won? A leadership vacuum could leave Hewlett-Packard adrift, they feared. If the company lost the vote, Fiorina might be followed out the door by several directors.
With the Hewlett-Packard arguments gaining credibility, Walter Hewlett's side responded. Hewlett, 57, who had relied mainly on his lawyer and public relations firm to speak to the press, started giving on-the-record interviews. A consulting professor of music at Stanford, Hewlett is a philanthropist and an intellectual with advanced degrees in music, engineering and operations research. He is the author of a software program that represents musical scores in symbols. Though not a business manager, Hewlett has been a Hewlett-Packard director since 1987, and he says he absorbed a lot from his father over the years.
On Feb. 19, Hewlett announced what he called a "focus and execute" strategy. He would focus on the company's lucrative printer business, emphasize profitability -- not size -- in the personal computer business and build up the corporate computer business with small, niche-filling acquisitions.
A week later, Fiorina, speaking to investors and analysts in New York, sneered at Hewlett's alternative. "It is not a plan," she said. "It is a press release."
Toughest exchange
Before long, Hewlett, a member of the compensation committee of the Hewlett-Packard board, responded, prompting the toughest exchange in the proxy fight. In late February, he disclosed that the company had considered rich pay packages for Fiorina and Capellas totaling US$115 million in salary, bonuses and stock options, with US$63.4 million earmarked for Fiorina.
Hewlett said Hewlett-Packard was trying to "hide the ball" by not disclosing those discussions, and the strong implication was that Fiorina and Capellas had a huge personal financial stake in the deal. The company's outside counsel replied that the board, long before Hewlett protested publicly, had reconsidered, deciding that the pay proposals did seem high and deferring the issue until after the merger.
There were no agreements -- and Hewlett knew that -- the company insisted, so there was no reason to disclose the discussions. Walter Hewlett's contentions, the company stated, were "plainly deceptive."
Then Hewlett released the minutes of the board committee meeting and the supporting documents. That was an outrage and a breach of boardroom confidentiality, the company declared. Still, the documents showed the pay packages being contemplated were quite detailed, running to several pages.
Hewlett had made his point: the consideration had been well along -- provisionally approved on Sept. 20, pending a discussion of the pricing of stock options -- and the terms were quite generous to Fiorina and Capellas.
All out contest
So it has been in the contest, point and counterpoint, charge and countercharge, tit for tat. Even Capellas, who is rarely in the direct line of fire, has been taken aback. "I'm not a choir boy," he said, "I understand that this is about getting votes. But the intensity of the political-style campaign absolutely surprised me."
As the proxy campaign has neared a finish, the efforts of both sides have intensified. Hewlett has led the opposition, but not alone. When a pair of bankers from Goldman Sachs & Co, Hewlett-Packard's financial adviser, showed up at the office of Institutional Shareholder Services in Rockville, Maryland, on Feb. 15 for a follow-up presentation, they were surprised when they looked at the sign-in log at the front desk.
A four-person delegation from the Packard foundation had been there, led by Platt, Hewlett-Packard's former chief executive and a director of the foundation, and Dean Morton, a former chief operating officer of the company and a foundation director. Until then, the big Packard foundation had not been seen as an active campaigner. It had announced its position in December, and then stood down.
But according to people familiar with the visits, the Packard foundation group had also talked to several institutional investors, including the California state pension system, the University of California endowment and Brandes Investment Partners.
Taking out ads
During the last few days, David Packard, the son, has also begun taking out ads against the deal, reprinting a 1960 speech by his father about the company's values. "If you are pondering how to vote on the proposed merger, you might ask yourself whether Bill and Dave could have devised a premeditated business plan that treated HP employees as expendable," they say.
On the other side, several HP directors -- including Richard Hackborn, a former chairman, Philip Condit, the chief executive of Boeing, and Sam Ginn, a former chairman of Vodafone AirTouch -- have come out swinging in support of Fiorina.
The vote is expected to be extremely close. Most of the company's 100 largest shareholders have talked to Fiorina and Hewlett in person. Steven Pigott is a director at one of them, the Citadel Investment Group, an investment firm in Chicago with US$7 billion in assets. Pigott, who called Citadel's Hewlett-Packard holding "sizable," tended to agree with Hewlett that the deal looks like a risky bet. He is leaning against the deal, he said.
But, he added, Fiorina is "just great" at presenting her case, and the "HP team can answer a lot more questions than Walter can."
Hewlett-Packard has gained ground recently, Pigott said last week. Among his institutional investor peers, Pigott senses what he terms the "NASCAR effect" -- a sporting curiosity, now whetted, to find out if Fiorina will succeed with the combined company or crash and burn. "It's an attitude of `All right, let's see what she can do,'" Pigott said.
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