HP/COMPAQ: Packard son joins opposition

Resistance to Hewlett-Packard Co.'s planned merger with Compaq Computer Corp. is growing, as reports surfaced Wednesday that David Packard, son of HP's co-founder, intends to join the Hewlett family in opposing the merger. The new objections could do more than simply kill the deal: One analyst said that if the merger fails, Carly Fiorina's tenure as HP's chief will likely end.

Packard issued a statement Tuesday to the San Jose Mercury News outlining his objections to the merger, according to Lehman Brothers Inc. analyst Daniel Niles, who obtained a copy of Packard's statement and reprinted it in his own research note. In the statement, Packard said he agrees with Walter B. Hewlett's criticisms of the deal; especially important, he said, is the deal's anticipated negative effect on HP's printing and imaging business, where Packard sees strong growth potential. Walter B. Hewlett is an HP board member and the son of HP's co-founder William Hewlett.

Packard also focused on the massive layoffs expected if the deal is completed. "For over fifty years, one of HP's fundamental corporate objectives has been to provide long-term employment for its people," Packard said in the statement. "I am perfectly aware that HP has never guaranteed absolute tenure status to its employees; but I also know that Bill (Hewlett) and Dave (Packard, HP's co-founders) never developed a premeditated business strategy that treated HP employees as expendable. This new approach seems likely to affect the confidence and loyalty of the remaining employees."

Packard is the founder of the Packard Humanities Institute, which owned 25.76 million shares of HP -- roughly 1.3 percent of the company -- as of HP's most recent proxy filing. The organization is "extremely unlikely" to support the merger, according to Packard's statement.

More critical is the vote of the David and Lucile Packard Foundation, HP's largest stakeholder, with an ownership share exceeding 10 percent. The Foundation's vote will make or break the merger, Niles said in his report.

The Foundation has not yet decided which way it will vote, and may not make a public announcement when it does, said George Vera, the organization's chief financial officer. It has only engaged a consultant to examine the matter "within the last few days," and is awaiting the proxy statement outlining the deal Compaq and HP's boards will soon file with the U.S. Securities and Exchange Commission, Vera said.

"We don't have any fixed time for completing the analysis," Vera said. "We're a bit more relaxed about this."

Walter B. Hewlett announced on Tuesday that he, his sisters Eleanor Hewlett Gimon and Mary Hewlett Jaffe, the William R. Hewlett Revocable Trust and the William and Flora Hewlett Foundation would all vote against the merger.

Analyst opinions about the likely impact of the recently-voiced family objections are mixed. Lehman Brothers now estimates the merger's chances of completion at 50/50, Niles wrote. More critically, the merger has become a key test of Fiorina: "We also view this as a vote on Carly as CEO," Niles wrote. "If the shareholders vote against this deal, it is hard to see how she will remain."

However, Gartner Inc. analyst Martin Reynolds said he thinks the merger isn't endangered. "My suspicion is that this will subside. The bigger risk was when the market initially had that negative reaction," he said. "Stockholders don't usually vote against these deals. They sell their stock instead." Reynolds declined to comment on what the recent objections mean for Fiorina.

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