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H-P, Compaq Merger Goes To Vote

The "H-P Way" is getting scrutinized and criticized as details of the mega-merger between Hewlett-Packard and Compaq Computer .

The companies Thursday filed S-4 forms with US Securities and Exchange Commission (SEC). The official documents outline the terms of the $22-billion deal.

But no sooner did the 115 plus page paper hit the streets, than analysts and investors began picking it apart.

Walter Hewlett, who has publicly come out against the proposed merger, Friday filed a statement with the SEC saying he plans to file a proxy to solicit H-P shareholders involving the proposed merger.

Hewlett, a H-P board member and son of the former co-founder, has not said if he will rally other shareholders to his side.

If the merger were to go through, the company will be headquartered in Palo Alto but retain a significant presence in Houston.

Carly Fiorina, chairman and CEO of HP, would become the chairman and CEO of the new HP. Michael Capellas, chairman and CEO of Compaq, will be president. Capellas and four other members of Compaq's current Board of Directors would then join HP's Board.

According to the terms of the deal, one Compaq share will be substituted for about 0.63 Hewlett-Packard shares, providing a premium of around 18 percent.

Company officials say the merger is designed to win more corporate customers, but it is also expected to heat up the competition in the sagging computer hardware sector especially for the likes Dell and Sun Microsystems , which have also suffered from recent sluggish sales.

One interesting note about the deal is that senior execs at H-P and Compaq are expected to receive hefty bonuses of more than $55 million if the merger goes through and they stay on until September 2003.

But the item that has raised the most eyebrows is an abandoned $22.5 million package for Fiorina and Capellas.

According to the proxy statement, Fiorina would have stood to gain $8 million; Capellas could have received $14.4 million. The offer was removed from the final statement.

But that didn't stop Fiorina from lobbying her own case. Employees at H-P say the CEO sent out a scathing e-mail Thursday followed by a reading over the company's intercom blasting the media and analysts for shoddy reporting of the merger to the public.

Despite the criticism, analysts say the merger is a good thing and the two companies will eventually come out ahead.

"While there were few if any surprises, the document details the process surrounding the merger for these companies," say analysts over at Goldman, Sachs & Co. "Once again, the S-4 suggests that H-P's already-strong cost management efforts should get even stronger, with the companies expecting more than $2.5 billion in savings by mid-fiscal 2004. Even before that, the companies expect the transaction to be accretive in the first full year."

Now it's up to shareholders to review the materials over the weekend and decide if the marriage is a good idea. It's likely that they will be subjected to more lobbying before the merger goes to vote next week.



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