HP/COMPAQ: HP slams Hewlett in letter to shareholders

Hewlett-Packard Co. released a letter to its shareholders Friday, trying to persuade investors of the merits of the company's proposed merger with Compaq Computer Corp. and levelling harsh criticism against Walter Hewlett, the lone merger opponent on the HP board.

The letter comes as the latest salvo in an ongoing battle between HP executives who support the deal and objectors to the merger. Hewlett and other members of the Hewlett and Packard families, and organizations with which they are affiliated, have vowed to vote their shares against the merger. The current Hewlett and Packard family dissenters own close to 18 percent of the company's stock.

HP executives continued to champion the deal with Compaq as a way to improve the company's server, storage and management software businesses. In addition, HP claims it can save US$2.5 billion annually through improved operating efficiency, which would translate into gains of $5 to $9 per share, according to the letter.

The letter also attacked Hewlett's credentials as an opinion leader concerning the merger decision.

"Walter Hewlett, an heir of HP co-founder Bill Hewlett, is a musician and academic who oversees the Hewlett family trust and foundation," HP said in the letter. "While he serves on HP's Board of Directors, Walter has never worked at the company or been involved in its management. His motivations and investment decisions are likely to be very different from your own."

HP's own profile of its board, on its Web page, describes Hewlett as "an independent software developer and chairman, Vermont Telephone Company."

Hewlett filed his own objection to the merger earlier this week, sending a letter to the shareholders urging them to vote against the merger. He claimed the merger would create a company that is "less focused and more troubled." [See "HP/COMPAQ - Hewlett urges 'no' vote on merger," Jan. 16.]Hewlett originally voted in favor of the merger during a board meeting and then later decided the deal was not in the company's best interest.

HP, however, claims it had already reviewed the items to which Hewlett objected and decided that proceeding with the deal is still the right action.

"The problem isn't just that he is saying no to the merger -- he's giving us nothing to say yes to," the letter stated. "While opposing the merger, he has failed to propose any alternatives that your Board hasn't already analyzed, debated and rejected because they fail to create sufficient shareowner value."

One analyst saw this latest attack by HP on Hewlett as a poor decision, saying it makes HP look like a bully attacking "the little guy."

"I think it is a mistake," said Rob Enderle, a research fellow at Giga Information Group Inc., in Santa Clara, Calif. "In the shadow of Enron (Corp.), people are very suspicious of large corporations. This comes off as a big corporation saying, 'We know better than you.' "Enderle referred to the recent collapse of former energy giant Enron and losses suffered by its investors. Enron's collapse, he argued, has investors on edge with regard to guidance from a company's board.

Even larger institutional investors in HP may be put off by the board's wording in the letter, Enderle said. Many of the corporate investors may identify with Hewlett, to some degree seeing him as an elder statesman.

"A lot of these guys are retired or nearing the end of their career," Enderle said. "They may say 'Hewlett is one of us; we need to stand by him.' "Enderle also joked about the apparent disagreement between the descriptions of Hewlett in HP's letter and on its Web site.

"Makes you wonder what they think he does for a living," he said.

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