Some Hewlett-Packard Co investors say Chief Executive Carly Fiorina should dump the planned purchase of Compaq Computer Corp before their shares extend this week's 22 percent decline.
"I'm very disappointed," said Jerry Dodson, president of Parnassus Investments, which sold its entire 75,000-share stake this week. "This was the final straw."
Fiorina last Monday said buying Compaq, the second-biggest personal-computer maker, for stock then valued at US$25 billion would increase her company's services and consulting business by adding new sales and workers. The agreement with Compaq follows the cancellation in November of talks to buy PricewaterhouseCoopers LLC's consulting unit for US$18 billion after Hewlett-Packard shares tumbled 44 percent in two months.
Some shareholders said that Fiorina's forecast for the Compaq agreement is too optimistic. Combining Hewlett-Packard, the second-biggest computer maker, and Compaq would be a management distraction that makes it easier for rivals such as Dell Computer Corp to lure away customers, analysts said.
"Eighty percent of mergers misfire, and this one is even worse than most," said Dodson, who had defended Fiorina in recent months and held on to the stock on the expectation that she would engineer a turnaround.
Shares of Hewlett-Packard have lost more than a fifth of their value this week, reaching their lowest point since November 1996, while Compaq has fallen 14 percent and reached its lowest point since July of 1996. The offer now is worth US$19.6 billion.
Hewlett-Packard rose US$0.38 to US$18.08, the first gain in nine days. Compaq rose US$0.24 to US$10.59.
Fiorina told Business Week magazine that the Compaq purchase won't be sidetracked by the stock market reaction.
"This is a very tight agreement," she said in an interview with the magazine. "You don't make this kind of move, and judge its success, by the short-term stock price." Fiorina, through a spokesman, couldn't immediately be reached to comment for this story. Compaq also couldn't be reached immediately for comment.
The tumbling share price has reduced the premium for Compaq shareholders to 8 percent from 19 percent, and investors said they want both companies to reconsider the purchase.
``If the shareholders continue to push the price down and give a very strong thumbs down, both boards will have to do some soul searching and decide in light of this new information to see if they go forward with it,'' said David Katz, chief investment officer at Matrix Asset Advisors Inc, which owns shares of both companies.
The negative reaction may also force Compaq CEO Michael Capellas to reevaluate the acquisition, investors said.
Houston-based Compaq and Palo Alto, California-based Hewlett-Packard each need approval from half of the shareholders for the purchase to go forward.
There's only a small chance investors would band together and veto the acquisition, Katz and other investors said.
"Based on the market reaction, a lot of people want it to fall apart," said Sunil Reddy, a money manager at Fifth Third Bancorp, which owns 1 million Hewlett-Packard shares. Still, "I cannot remember the last time shareholders rejected a big mega-deal. It's tough for shareholders to unite."
More likely, they said, is that management would watch dissatisfied stockholders flee the shares and call off the purchase.
"Shareholders are voting with their feet," said John Waterman, managing director at Rittenhouse Financial Services, which sold its entire Hewlett-Packard stake of 7.62 million shares before the purchase announcement.
Shareholders are now voicing some of the same concerns raised when Hewlett-Packard was considering the Pricewaterhouse acquisition: the tough and lengthy integration process and the payoff from making such a huge acquisition.
As part of the agreement, Compaq and Hewlett-Packard have each said they would pay a US$675 million break-up fee for ending the agreement. If investors continue to balk, Katz said the two may decide to drop that fee and just walk away.
Still, the Compaq purchase is already further along than Pricewaterhouse ever got. Both boards unanimously approved this purchase.
That leaves Fiorina and Capellas with a lot of work to do, promoting benefits that shareholders say are hard to discern.
"They have a window to really convince the Street that there is something here," said Waterman.
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