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HP/COMPAQ - Proxy fight looms, but key voters stay quiet

HP/COMPAQ - Proxy fight looms, but key voters stay quiet

Hewlett-Packard board member Walter Hewlett, son of HP co-founder William Hewlett, intends to launch a proxy fight to block the planned acquisition of Compaq Computer, according to a Friday filing with the U.S. Securities and Exchange Commission (SEC).

Signals that Hewlett was contemplating a proxy fight first emerged earlier this month. After switching positions and publicly announcing his opposition to a merger he initially supported, Hewlett hired proxy solicitation advisors MacKenzie Partners. On Friday, Hewlett submitted notice that he intends to file a statement relating to a solicitation of proxy votes from HP shareholders. Joining him in the solicitation, according to the filing, will be his sisters, Eleanor Hewlett Gimon and Mary Hewlett Jaffe, and Edwin E. van Bronkhorst, former chief financial officer of HP and a trustee or director of several Hewlett and Packard family trusts and foundations. A representative of MacKenzie Partners did not immediately return calls seeking comment.

Walter Hewlett also filed with the SEC on Friday a report compiled for the trustees of the William R. Hewlett Revocable Trust, which owns 84.8 million shares of HP -- roughly 4.5 per cent of the company's outstanding total. The report recommends against supporting the merger, citing the transaction's integration risks, its potential dilution of HP's business portfolio, and the unlikeness that it will improve HP's position within the industry.

A proxy fight, combined with the opposition of both the Hewlett family and David Packard, son of HP's other co-founder, casts serious doubt on the ability of the two companies to complete the merger, said several analysts. However, HP's largest shareholder is reserving judgment on the deal, and HP's relatively strong fourth-quarter performance helps bolster confidence in the management team, analysts said.

"I think the merger is in trouble," said Charles Wolf, an analyst at Needham & Company. "It strikes me that the initial take was that they are better off together than alone, and now it seems that HP is better off alone."

Hewlett's vocal opposition to the merger "certainly creates a tension," said Richard Chu, an analyst with SG Cowen Securities. "It is unlikely to be easily resolved. There are some significant issues."

He added, however, that HP's recently announced quarterly results are a point in the management team's favour. While HP posted a sharp year-over-year decline in revenue and net profit, it beat analysts' expectations for the first time in a year.

HP's strong execution in a weak economy helps demonstrate that the company's executives are leading it in the right direction, Chu said. "The management has bought some time with the fourth-quarter results, and has earned the right to be heard."

Still, he estimates the merger's likelihood of completion at "no better than a 50/50 chance."

Those are the same odds Lehman Brothers analyst Dan Niles gave the deal several weeks ago, after David Packard joined the opposition. Now, following HP's fourth-quarter results, Niles has upped his confidence in the deal. Lehman Brothers currently calculates the deal's chances of closing at 75 per cent, Niles said in a research note issued Thursday.

"Given the Packard Foundation said it would consider (fourth-quarter) results in deciding which way to vote, we believe the likelihood of the merger completing has increased," Niles wrote.

The David and Lucile Packard Foundation is HP's largest shareholder, with an ownership stake exceeding 10 per cent. Its vote could make or break the merger. The organisation is still studying the proposed merger and remains several weeks or even months away from a decision, CFO George Vera said earlier this month.

The Foundation isn't alone in its wait-and-see approach. Despite all the sound and fury surrounding what will be, if completed, one of the IT industry's most influential mergers, the paperwork on the deal is just getting started. HP and Compaq filed Thursday with the SEC the preliminary version of their joint proxy statement/prospectus advising shareholders on details of the intended merger. A final version of the proxy awaits the SEC's review. Regulatory approvals for the merger are also still pending: The U.S. Federal Trade Commission has requested additional information on the merger, slowing the approval process.

Institutional Shareholder Services Inc., a firm that advises institutional investors on proxy matters, won't distribute its voting recommendations until three weeks or so before the HP and Compaq shareholders meetings, according to representatives. Those meetings have not yet been scheduled. HP and Compaq say they still expect the transaction to close in the first half of 2002.

(Ashlee Vance, in San Francisco, contributed to this report.)


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