HP/COMPAQ: Packard Foundation votes against merger

Board members of the David and Lucile Packard Foundation, an influential Hewlett-Packard shareholder, voted Friday to oppose the proposed merger between HP and Compaq Computer, a move that could potentially sink the US$25 billion deal, according to some analysts. In a statement Friday, Susan Packard Orr, chairwoman of the Foundation, said that "the best interests of the Foundation would be better served by Hewlett-Packard not proceeding with the proposed transaction".

The decision means that the Foundation will oppose the merger when it goes to a final vote at HP's annual shareholder meeting. A date for that meeting hasn't been set, though industry experts expect it to take place in February.

The Packard Foundation owns a 10.4 per cent stake in HP and is considered by many to hold the swing vote in the merger. Analysts have said that how the Foundation sides could have a profound effect on whether the deal goes through.

"We do believe that the Foundation's vote will ultimately determine the outcome of the merger," said Toni Sacconaghi, senior analyst with Sanford Bernstein & Co in New York, in a research note issued earlier Friday. Based on how the merger is expected to pan out for the two technology giants, Sacconaghi said "a no vote on the proposed deal is the 'safer' bet" for the Foundation.

For users, the potential impact of the merger remains unclear. The companies oversee a vast portfolio of products ranging from PCs and printers to enterprise-class servers and storage systems. Some overlapping products will be discontinued if the merger goes through, although the companies have yet to spell out which ones they plan to ditch.

Analysts have said their respective server operating systems, Compaq's Tru64 and HP's HP-UX, are unlikely to exist side by side for long if the merger goes ahead, leaving businesses who use those platforms temporarily unsure about their future.

Packard Foundation board members, who include children of HP co-founder David Packard, met Friday to determine their position on the proposed merger. Before their vote they were scheduled to hear a presentation from consultants Booz, Allen & Hamilton, an adviser to the Foundation.

Board members had also been briefed by HP executives who support the merger, and by Friedman Fleisher & Lowe, a consulting firm commissioned by merger opponent Walter B. Hewlett, son of HP's co-founder, to research the proposed deal.

In a joint statement issued late Friday, HP and Compaq said they would forge ahead with their merger plan despite the lack of support from the Foundation and other family members.

"We are disappointed by the Packard Foundation's preliminary decision," the companies said. "Nevertheless, our responsibility to shareowners, customers and employees requires that we maintain a pragmatic view of the business and a focus on the future."

The companies also said they would continue to educate shareholders about what they see as the merits of the deal in an attempt to sway opinion in their favour.

That could prove to be a difficult task, according to one analyst. The Foundation did much research in preparation for its vote Friday, making it harder for proponents of the deal to argue that it would benefit both companies, said Rob Enderle, an analyst with Giga Information Group.

"Clearly the Foundation did its homework," Enderle said. "It makes it very difficult now for HP executives to go back and say 'you don't fully understand this'."

Already, family members of co-founder William Hewlett have come out in opposition of the deal. Walter Hewlett filed papers with the US Securities and Exchange Commission last Wednesday highlighting the poor financial performance of the two companies since the merger was first announced.

Hewlett also issued a statement in response to Friday's events in which he applauded the Foundation's decision. He said that HP "can create greater value for stockholders as a stand alone company than as a company combined with Compaq."

Eleanor Hewlett Gimon and Mary Hewlett Jaffe, and The William R Hewlett Revocable Trust, also have voiced opposition to the merger. So has David Packard, the son of company's co-founder.

In his research note, Sacconaghi said opposition from the influential Foundation should help HP's stock price, which has fallen since the deal was first announced.

Ahead of the news, HP's stock [HWP] closed at $US23.52, up 0.81 percent for the day, and climbed 6.34 per cent to hit $25.01 in afterhours trading. Compaq's [CPQ] shares closed at $US11.32, up 1.89 per cent on the day, but sunk more than 11 percent on the after-hours markets.

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