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Thu, Mar 07, 2002 - Page 21 News List

H-P wins backing for Compaq merger

INDEPENDENT OPINION An outside group hired to evaluate the proposed merger says it would be profitable, handing a defeat to dissident director Walter Hewlett


Hewlett-Packard Co won the backing of proxy adviser Institutional Shareholder Services for the proposed US$22.3 billion acquisition of Compaq Computer Corp, a victory for Chief Executive Carly Fiorina two weeks before an investor vote.

"We were convinced by the end of the process that they could accomplish their goals," ISS Vice President Patrick McGurn said in an interview. The recommendation may influence the votes of institutions that control about 20 percent of Hewlett-Packard's shares, analysts said.

The firm's support is crucial to Fiorina's final push to win approval and defeat director Walter Hewlett, son of company co-founder William Hewlett, in his effort to block the purchase.

Walter Hewlett has been laying out alternate plans for the computer maker, including replacing Fiorina. The founding families plan to vote the 18 percent of shares they control against the deal.

Some investors and analysts said the ISS recommendation makes it more likely that the purchase will go through.

"It probably stacks the deal a little bit in favor of the merger," said Doug Altabef, a senior managing director at Matrix Asset Advisors Inc, which owns shares of both companies and opposes the purchase. "They didn't couch it. The synopsis is very much a positive [for the deal]."

Walter Hewlett said in a statement that he "strongly disagrees" with the proxy adviser's decision.

ISS found that the US$2.5 billion in savings the companies expect from the deal are achievable, and cited Hewlett-Packard's recent better-than-forecast quarterly sales and profit as a reason for confidence in management. The firm, which advises institutional investors about how to vote on corporate governance issues, also said officials have spent enough time deciding how to integrate the computer makers' operations.

Financial feud

* The recommendation by ISS may influence the votes of institutions that control about 20 percent of Hewlett-Packard's shares.

* The founding families of Hewlett-Packard plan to vote the 18 percent of shares they control against the deal.

* H-P investors will vote on the acquisition on March 19. Shareholders in Compaq are scheduled to vote March 20.

ISS, which heard from both sides almost daily as the decision approached, said that Palo Alto, California-based Hewlett-Packard's 4.9 percent revenue loss after the transaction was more realistic than the 10 percent assumed by Walter Hewlett. "The Compaq merger is predicated very much on the longer-term value created by a combination," ISS said in its report.

The adviser also met with Hewlett-Packard Vice President Webb McKinney and Compaq Chief Financial Officer Jeff Clarke, the executives who will lead the integration efforts, and came away convinced they could pull it off.

Walter Hewlett, who contends that the transaction will make the company too dependent on low-profit personal computers and hurt its industry-leading printer business, said ISS missed the point that the deal will destroy shareholder value.

"ISS clearly has a predisposition to support management and makes a general assumption that boards do the right thing," he said in a statement. "In the post-Enron world, it is obvious that these assumptions need to be questioned."

ISS found that Walter Hewlett's proxy fight probably forced the computer makers to spend more time working on integration. In the report, the adviser noted that Fiorina personally worked on many of the "cultural" issues, and called the deal "one of the most exhaustively planned combinations ever."

"We're gratified that an independent expert, who took the time to really understand this thoroughly, thoroughly agrees with its strategic logic," Fiorina said on a conference call.

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