HP's Fiorina: Merge or Wither

Fiorina and CFO Bob Wayman told financial analysts at a meeting in New York that Hewlett-Packard could take merger charges of up to $1.4 billion if the $21 billion deal went through, revealing the merger cost figures for the first time.

Wayman said Hewlett-Packard would still beat Wall Street expectations for fiscal 2003 if the merger went through.

But Fiorina, sounding like a politician in a tight race ahead of shareholder votes on the controversial merger next month, focused on a broader theme: that the technology industry is consolidating and success favors bigger companies that can serve customers' every need.

Analysts call the March 19 vote by Hewlett-Packard shareholders a toss-up, while opponents accuse each other of muddying the water with studies and personal attacks.

Institutional Shareholder Services, which many institutional investors depend on for proxy voting advice, expects to publish its opinion of the deal early next week, but some investors at the analyst meeting said they would pay less attention than usual to ISS, given the high stakes.

Waiting Game

"Many shareholders are rightfully inclined to wait until the last minute to commit," Wayman added.

Mona Eriba, a former Wall Street analyst turned technology fund investor for Rosetta Management, says she worries HP picked the wrong mate and is neutral on the deal.

"Compaq is like Frankenstein. It's a monster company that failed to integrate prior mergers with Digital Equipment and Tandem," Eriba says of Compaq's two largest prior deals. "'Now we have the bride, Hewlett, marrying Frankenstein."

The deal would combine computer and printer maker Hewlett-Packard with Compaq, the No. 2 PC maker, which also makes computer servers, computer storage and offers services. Hewlett-Packard says the merger would allow it to offer customers one-stop shopping.

Dissident Hewlett-Packard board member Walter Hewlett, a son of one of the founders, argues the deal would create a bloated PC business and dilute the value of Hewlett-Packard's printing franchise.

Wayman addressed those concerns during a meeting with reporters: "If for some reason it does not make sense to keep PCs as part of the portfolio, putting the two companies together gives a better way, that is a stronger asset, to be able to spin out. But that is not our plan."

Fiorina also hit back at Walter Hewlett, and denied that she had cut a lavish deal for her post-merger pay, saying executives should be paid at market rates.

Hewlett said Tuesday that Hewlett-Packard in early negotiations had considered a two-year package worth $70 million, including salary, bonuses and options, for Fiorina. He said a proposed package for Compaq CEO Michael Capellas totaled $48 million.

"Standing still means losing ground. Standing still means choosing the path of retreat, not leadership," Fiorina, the driving force behind the merger, told a standing-room only crowd of about 250 analysts, many of whom left the room soon after she finished. "In a consolidating industry, do we ensure that our enterprise computing business has scale to truly be a platform of choice, or do we allow it to be subscale and slowly wither?"

Aiming to harden up its financial analysis of the deal after repeated attacks by Hewlett, Wayman forecast the merger would generate charges for restructuring of $450 million to $700 million and an additional $450 million to $700 million for purchase accounting and goodwill costs.

The cash impact of the charges would be $800 million to $1.2 billion, he said.

He also estimated that earnings per share for fiscal 2003 for the combined companies at $1.51, up 12 percent from the Wall Street consensus for Hewlett-Packard's stand-alone earnings of $1.35 a share.

Unlike Compaq, which has emphasized its ability to prosper even if the deal fails, Hewlett-Packard did not offer a longer term outlook for an independent future.

In afternoon trade on the New York Stock Exchange, HP shares were off 1 cent to $20, while Compaq fell 28 cents, to $10.12.

Shares of HP have fallen 14 percent and Compaq is down 16 percent since the Aug. 31, the last trading day before the merger plan was announced, underperforming competitor IBM, which is down about 1 percent.

Additional reporting by Eric Auchard in New York and Peter Henderson in San Francisco

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