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HP/Compaq Merger Still Up For Grabs

With two weeks to go till the shareholder vote, the HP-Hewlett proxy battle rages on.

Literally seconds after an independent investment advisory firm said it supports the proposed merger between Hewlett-Packard and Compaq Computer Corp. , both sides claimed victory.

The favorable report from Rockville, Md.-based Institutional Shareholder Services said it supported the $22 billion marriage, but acknowledged that there are still many issues that need to be addressed.

Holding the White cards in the issue is HP CEO Carly Fiorina, who reportedly wept when she heard the news from ISS.

"The ISS recommendation is an important milestone as momentum for the merger continues to build," says Fiorina. "With the support of our shareowners at the March 19 special meeting, the merger could be completed within a matter of weeks."

On the Green side, dissident board member Walter Hewlett was less than forgiving about the report or the success of the merger.

"We believe ISS has missed the point -- we believe that the HP/Compaq merger will destroy stockholder value," says Hewlett. "ISS clearly has a predisposition to support management and makes a general presumption that boards do the right thing. In the post-Enron world, it is obvious that these assumptions need to be questioned."

Both sides Wednesday resumed their media blitz for the hearts and minds of the undecided shareholders.

Hewlett is rallying against the merger online at the 'Vote No HP Compaq' Web site>.

HP has established its own 'Vote The HP Way' merger support site.

Circling The Wagons

By all appearances the merger should pass without a hitch.

The antitrust commission of the European Union voted in favor of the transaction on January 31, "without conditions." And a recent survey of 243 HP and Compaq clients found a majority would not switch technology providers if the merger were successful.

However, David W. Packard, son of HP co-founder Dave Packard surveyed three different HP plants and found a majority of employees do not support the merger.

And merger opponents, including the Hewlett and Packard families and their foundations make up 20 percent of the company's total shareholders and only 5 percent of shareholders have so far lined up on HP's side of the fence. Even though the merger needs only a simple majority to be approved, some 40 percent of shareholders are reportedly undecided. That has HP brass a little more than nervous.

"Every vote is important," says Fiorina.

Now that the ISS is behind the merger, most analysts give the deal a 50-50 chance.

First Albany Corp., which just initiated coverage of HP Tuesday was not impressed.

"We believe that investors are taking on material risk for relatively modest upside to HWP's standalone FY 2003 earnings," says First Albany analyst Walter Winnitzki.

Then there is the ISS report.

In its opinion, ISS says, "We have found adequate grounds to justify supporting the merger in the form of an exhaustive integration plan and a record of board discussions among reputable independent directors that allows us to confidently trust the judgment of eight of nine members of the HP board."

But the recommendations, even by ISS, do not guarantee that HP or Compaq voters will fall in line.

What's Still At Issue

What Hewlett and ISS say undecided shareholders will need to consider in the next two weeks are some of the core problems they see with the merger.

1. Integration: Even HP says it acknowledges the problems of meshing two huge companies together. The ISS says the combined company will be faced the challenge of retaining HP and Compaq customers as redundant product lines are phased out and points of contact with customers change.

2. Operating Margins: HP says the merger will improve its operating margins across the board, yielding a company-wide margin of nine percent by 2003, up from three percent in 2001. ISS says it trusts what HP is doing but says its up to management to make it happen. Hewlett calls it an unacceptable risk.

3. Conflict of Interest: Hewlett and his team argue that the HP and Compaq CEOs were promised compensation packages that together had a value of $115 million (of which Ms. Fiorina's share was $63.2 million). ISS says it found no "smoking gun."

HP shareholders are expected to vote on the merger on March 19. Compaq investors will vote the next day. The deal is expected to be resolved - one way or another - by April.