HP, Compaq merger gets a boost

Associated Press

SAN JOSE, Calif. — A highly influential proxy research firm recommended Tuesday that Hewlett-Packard Co. investors approve the proposed $22 billion acquisition of Compaq Computer Corp., giving new life to HP’s efforts to complete the hotly contested deal.

After reviewing thousands of documents and listening to personal appeals from HP executives and merger opponent Walter Hewlett, Institutional Shareholder Services of Rockville, Md., said the deal could be an excellent long-term strategic move for the companies despite sizable risks.

The Institutional Shareholder Services decision was crucial because more than 20 percent of HP shares, including those held by the Hewlett and Packard families and their foundations, are already lined up against the deal, and only about 5 percent of HP shares appeared to be in the company’s camp.

A negative report widely would have been seen as a fatal blow for the deal. Analysts had said a positive report from research firm would leave HP with a 50-50 chance of winning the fight.

Walter Hewlett immediately blasted the report, saying the firm "missed the point." In a statement, Hewlett said he still expects to win the proxy fight because many investors independently evaluating the deal agree with his arguments.

Some analysts and HP’s chief financial officer have estimated that as many as 40 percent of HP shares are held by investors who either will follow the research company’s advice or will be in some way influenced by the report.

Other analysts put the total much lower, because this deal is so vigorously contested that most money managers will weigh a variety of factors in deciding how to vote.

But at a minimum, Institutional Shareholder Services could control about 10 percent of HP shares because some investors have ISS vote for them. Barclays Global Investors — which owns 3.1 percent of HP stock and is the company’s fourth-largest investor, has put its votes in Institutional Shareholder Services’s hands because Barclays chief Patricia Dunn sits on HP’s board.

HP shares rose 5 cents to $20.60 Tuesday on the New York Stock Exchange before the report, but fell to $20.05 in after-hours trading. Compaq shares dropped 7 cents to $10.58 in regular trading but leaped 5 percent in the extended session.

With HP and Walter Hewlett locked for months in a bruising, political-style campaign for shareholder support, the Institutional Shareholder Services vote loomed as something of a primary election. The merger campaign is expected to only intensify as the March 19 shareholder vote gets closer.

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

HP and Compaq believe merging will make them a dominant force in several growing technology markets, especially corporate computing and high-tech services, while improving the economics of their struggling personal computer divisions and generating $2.5 billion in cost savings.

Hewlett and other merger opponents worry that absorbing Compaq into HP would be a difficult and distracting process, and that the acquisition would dramatically increase HP’s exposure to the slumping PC business at the expense of the profitable printing and digital imaging division.

The report, authored by Ram Kumar, the firm’s assistant director of U.S. research, closely examined both sides’ arguments and the corporate governance process involved in planning the deal.

Although Institutional Shareholder Services said "we share Mr. Hewlett’s belief that integration is one of the most daunting problems facing a combined HP-Compaq," it concluded that the companies appear up to the task.

Copyright ©2002 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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