HP Responds to Walter Hewlett’s SEC Filing

The squabbling between Hewlett-Packard top management helmed by CEO Carly Fiorina and CFO Bob Wayman versus Walter Hewlett, son of HP co-founder William Hewlett, heightened its pitch today following a Feb. 17, 2002, Securities and Exchange Commission filing on behalf of The William R. Hewlett Revocable Trust and its trustees.

The filing, titled “HP Has Higher Value, Lower Risk Strategic Alternatives to the Proposed Merger,” is the latest in Hewlett’s continued grousing about the $22 billion merger with Compaq Computer and an aggressive campaign to discredit Fiorina and keep the company from watering down profits and extending its reach beyond its grasp, or so says Hewlett.

Hewlett’s filing comes on the heels of criticism that his opposition to the merger has not been backed by a viable, concrete alternative. On Feb. 12, 2002, Hewlett made it publicly clear that he was not offering an alternative plan to the merger, but then one week later changed his tune and offered up a proposal to HP shareholders, 18 percent of whom are descendents of either the Hewlett or the Packard side of the company’s founding fathers.

Details of the plan are laid out in a “Focus and Execute” strategy that suggests “innovation, tactical acquisitions, and blocking and tackling, rather than betting HP’s future on commodity computing and a protracted and risky integration.”

Hewlett believes that HP has the potential to realize $14 to $17 greater value per share relative to the proposed merger with Compaq and that the company should instead revive bread-and-butter sales of its printing and imaging products, build on the company’s mid- high-end enterprise solutions, and focus on PC profitability, rather than scale.

“By focusing on high-margin growth businesses,” stated Hewlett’s SEC filing, “HP has the potential to double operating margins from 4.2 percent to 8.4 percent. In addition, because this strategy yields a more attractive business mix with less risk, it should achieve a more attractive earnings multiple than the proposed merger with Compaq.”

Hewlett continued by saying: “Investors have a clear choice. If they are looking to enhance stockholder value, we believe that they should reject the proposed merger with Compaq. The strategy we have outlined is attractive to investors because we believe it will enhance stockholder value at a lower risk.”

HP management fired back today against Hewlett’s proposal by calling it inconsistent and poorly thought out.

“HP shareholders deserve a carefully considered, comprehensive plan, not last minute propositions that change weekly,” said HP management in a prepared statement. “Over the last two and a half years, the HP board and management team have thoroughly analyzed a wide range of strategic alternatives and concluded the merger with Compaq represents the single best way to create sustainable shareowner value across our business.”

The crux of HP’s argument is that the merger is expected to substantially improve the company’s market position by boosting HP into the number one slot as a producer of servers, storage, management software, PCs, and printing and imaging products.

In a counter move to HP’s dismissal of his SEC filing, Hewlett published an open letter to shareholders today pleading with them to consider his alternative strategy. Hewlett also suggested that opposition to the merger is far more widespread among shareholders than HP management previously predicted.

“We continue to see the same strong opposition among HP stockholders to the proposed Compaq merger that we have seen since we publicly announced our position against the merger,” stated Hewlett. “We believe we are seeing widespread, strong opposition and we are confident that we are doing very well.

HP shareholders will vote on the merger on March 19.

In the meantime, HP went public today with a new line of practical, highly saleable devices for small office/home office (SOHO) consumers that combine the functions of a printer, fax, scanner, and copier in one piece of hardware. HP’s new SOHO gadgets will be available in April, 2002.

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