Disputed Merger Deal
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SPENCER MICHELS: More than a thousand Hewlett-Packard shareholders cast votes in person today on whether the company should purchase Compaq Computer Corporation.
Most of the other shareholders have mailed in their proxy votes over the past few weeks. Both HP Chairwoman Carly Fiorina, who proposed the deal, and her chief opponent, Walter Hewlett, son of an HP founder, were present.
On Sept. 4 of last year, the two computer heavyweights announced the biggest marriage in the world of high tech.
On one side was HP, a legend in corporate history — the very first Silicon Valley tech company, which began in this California garage in 1939, the brainchild of Stanford graduates Bill Hewlett and David Packard.
Today, HP is a leader in imaging and printers, and the world’s number-two computer maker, just behind IBM.
At number three sits Compaq, which HP wants to acquire for more than $20 billion in order to compete with IBM by creating a new services and high-end computer powerhouse.
Last fall, HP and Compaq boards approved the deal, pending approval from a majority of shareholders.
CARLY FIORINA, Chairwoman & CEO, Hewlett-Packard: This is a massive integration effort. One could argue it is the largest integration effort in the technology industry, and we’re trying to integrate in a very difficult overall environment.
MICHAEL CAPELLAS, CEO, Compaq Computer Corporation: When this finally comes through and when everything is put together, we’ll be the number-one partner of Microsoft, of Oracle, of SAP, of Intel, and of countless other companies. And with that, that brings the capability of a core competency of partnerships.
SPENCER MICHELS: But two months later, before the shareholders could vote, Walter Hewlett, son of founder Bill Hewlett and an HP director, said he and his family opposed the deal, as did the Hewlett family trust and foundation.
The William and Flora Hewlett Foundation provides some funding for the NewsHour.
A month later, the Packard Foundation, a philanthropic organization, said it, too, was against the deal. In all, the Hewlett and Packard families and organizations represented 18 percent of the shareholders.
Nevertheless, the two companies said they still planned to pursue the deal, setting off a political-style campaign for HP shareholder votes that one observer calls “the tally in the valley.”
In addition to the 18 percent of company shares owned by the Hewlett and Packard organizations, 57 percent of the shares are owned by large institutions like banks and retirement funds. The remaining 25 percent are owned by individual investors.
To influence the shareholders, both sides have taken out full- page newspaper ads. One side says customers will win from the merger. The other calls it a $25 billion mistake. They’ve also set up Web sites for their cause: www.Votethehpway.com shows HP CEO Carly Fiorina touting the merger in a TV interview. Meanwhile, www.votenohpCompaq.com features its own interview, this one with Walter Hewlett.
Today is the last day of voting for HP shareholders. Carly Fiorina said early tallies were encouraging for her side.
CARLY FIORINA: We, of course, acknowledge this is not yet an official vote, but we do think that we have sufficient votes to pass the merger.
We are certainly gratified that HP shareholders recognize the compelling strategic and economic benefits of this combination.
SPENCER MICHELS: Walter Hewlett wasn’t ready to concede defeat.
WALTER HEWLETT, Director, Hewlett-Packard: While we are optimistic about the eventual certified outcome of today’s vote, we believe that regardless of the final result, today is a clear victory for HP stockholders and for all stockholders.
SPENCER MICHELS: The counting of HP votes could take two weeks or more. Compaq shareholders vote tomorrow. They’re expected to approve the deal easily.
MARGARET WARNER: For more on the fight leading up to today’s vote, we’re joined by Roger McNamee, cofounder of Integral Capital Partners, a technology investment firm in Silicon Valley; Nell Minow, editor of The Corporate Library, a Web site that serves as a watchdog on corporate governance; and Steve Lohr, technology reporter for The New York Times. Welcome to you all.
Steve Lohr beginning with you, what do you make of the assertion by Carly Fiorina today that she thinks her side has won this battle?
STEVE LOHR: Well she clearly thinks that they have won overwhelming majority of the institutional votes since 18 percent of the votes were already opposed to them from the Hewlett-Packard families and foundations and the thinking was that the individual vote, which 25 percent of those company is held by individuals would be about even.
So, she had to have done a very good job of selling the deal to the large institutional shareholders.
MARGARET WARNER: But Mr. Hewlett says he doesn’t think it’s a done deal and explain why we’re not going to know the outcome for at least a couple of weeks.
STEVE LOHR: Because in a very close contest you don’t know until a small firm in Newark Delaware makes the final count and that is going to take a couple of weeks.
MARGARET WARNER: Just for people who don’t know how the proxy fights work, I gather that individual investors who got the ballots at home could vote multiple times and the only one that counts is the last one they counted? They voted?
STEVE LOHR: That’s correct.
MARGARET WARNER: So this little firm… go ahead, explain what the little firm has to do.
STEVE LOHR: If there are 14 votes from Joe Smith they have to on tables they set out the ballots alphabetically under the people’s names and then they match up the names and dates on the proxy ballots and they determine which is the last one and that’s the one that counts.
MARGARET WARNER: So Roger…
STEVE LOHR: People can switch votes as much as they want.
MARGARET WARNER: Roger McNamee how unusual is this proxy fight?
ROGER McNAMEE: I’ve been investing in technology companies for 20 years and this is by a mile the most confusing and intense proxy battle I have ever seen.
MARGARET WARNER: Give us the flavor of it.
ROGER McNAMEE: Well, the key thing to understand is that the family tree of Silicon Valley starts with Hewlett-Packard.
This is a company that established the culture of our economy and in all candor literally tens of thousands of employees feel that their stakeholders, they are shareholders, and feel entitled to have an opinion either for or against this deal. And a lot of the individual investors that we were talking about are those people.
A similar thing is true of Compaq, which one of the innovators in personal computers and is as important to the technology industry of Texas as Hewlett-Packard is to Silicon Valley.
This is incredibly emotionally charged, and I think that the amount of discussion about the merits of the deal — you know — was very small in comparison to the emotional back and forth whether two huge and venerable companies should in fact get together and pool their futures.
MARGARET WARNER: Nell Minow, what you would add to this? This has been compared in some articles to a family feud.
NELL MINOW: That’s what I would add to it; that’s what makes this one really unique. I have never seen anything like this — to have a member of the board of directors vote for the deal in the boardroom and then walk out the door and say, no I’ll oppose the deal with my own money, is absolutely unprecedented.
And the fact that there are family relationships it’s so unusual. It’s tempting for founders to set up foundations so they can conduct their philanthropic activities, but at the Bill Gates Foundation for example, they sell their Microsoft stock right away. It’s unusual for them to hold on to the stock. And the fact you still have these huge block holders is also very unusual.
MARGARET WARNER: Steve Lohr, the arguments have become quite personal, some of the language in the ads become quite personal, hasn’t it?
STEVE LOHR: Yeah, the two most pronounced episodes were Hewlett-Packard calling Walter Hewlett a musician and academic sort of belittling his qualifications for questioning a business deal. And then Walter, who is of course a member of the Hewlett-Packard board leaked compensation agreement guidelines or consideration that was done — not approved by the Hewlett-Packard board — but showed that Carly Fiorina and Mike Capellas would get an estimated $115 million compensation package if the deal went through and the effect of that was to sort of try to portray them as greedy and duplicitous.
MARGARET WARNER: Roger McNamee, when this merger proposal was announced last Sept. 4, Wall Street initially was not very excited about it.
How do you explain that even got this close, however it comes out?
ROGER McNAMEE: Well, I think it is a real tribute to Carly Fiorina’s political skills.
I think she went to the institutional investors in the period after Sept. 11, when frankly people were quite distracted. Took her case to them and made it apparently effectively. And now the challenge of course is to prove that her case is the right one.
MARGARET WARNER: Let me interrupt you though. Explain what was her basic case, why this was going to be good.
ROGER McNAMEE: Simply put, Hewlett-Packard and Compaq each compete in the personal computer industry against Dell, and one of the rationales for this merger is by putting the companies together they’ll have a scale that allows them not only to compete against IBM for big company requirements but to compete against Dell for every day personal commuters. And if they can make the merger work, that is indeed true and I think the challenge now is to go out and execute on it.
MARGARET WARNER: And Nell Minow tell us a little more about Mr. Hewlett’s objections; he also made a lot of strides especially with individual investors. What was his basic argument of why this was bad for the company?
NELL MINOW: His most powerful argument was history.
No one has done a good job of integrating two companies like these ever before and in fact, Compaq did a terrible job of integrating its last merger partner, Digital. And so why should we believe them now, why should we believe that they can do it?
Both sides have said it all comes down to execution, and with the shareholders it was whether they believed that this was going to happen or not. I have a feeling that in addition to Carly Fiorina’s good salesmanship one of the reasons the shareholders ended up going for it, which I think they did, is that people on Wall Street tend to think if there is a better deal out there it will appear. And since no other bidder appeared, I think they thought this was the best they could do.
MARGARET WARNER: And Steve Lohr wasn’t one of the issues, what would happen to the so-called crown jewels of the Hewlett-Packard business?
STEVE LOHR: Yes. This was Walter’s point, that the printer business accounts for virtually all of the profitability of Hewlett-Packard and that as part of this larger corporation that would have a much larger stake in the personal computer business, that the role of the printer business would be diluted and smaller and that would be bad for shareholders.
MARGARET WARNER: Roger McNamee all the stories or a lot of the stories about this have said that it’s all taking place in the context of a really flagging computer business, particularly the PC market.
Explain that and how closely this is being watched by the rest of the industry.
ROGER McNAMEE: Well you can imagine that something emotionally charged as this merger discussion and the shareholder vote is going to distract an entire community and it has certainly done that to Silicon Valley.
This comes at a time when the PC industry is showing all signs of being mature. It’s not going to go away. This is one of the corner stone industries of our economy, in some ways similar to what the automobile industry has been the last 50 or 60 years. And yet these are two of the largest players in it and they’re looking for a way to resume the growth that made both great companies.
And I think the whole industry is grappling with this, how do you grow in this environment? I don’t think it will be easy. The challenge obviously is to put number two and number three together and get number one out of it. And if they’re successful doing that, then this will be a great, great merger, but obviously they have to execute it in an environment that is not going to give them a lot of room to maneuver and it gives them every incentive.
One of the great things about this fight is that every single employee at Hewlett-Packard and Compaq knows how important it is to make this merger work. And I think that a hidden benefit of how nasty things got over the last few months.
MARGARET WARNER: Nell Minow, just your comments how this is being watched by the industry and what you think the significance is going to be for the industry.
NELL MINOW: I think the biggest significance from this is that it has shown us even more powerfully that Enron did how flawed our whole corporate governing system is.
Walter Hewlett says that he wanted to vote against the deal and what they responded to him in the boardroom was it’s gong through with you or without you and it will cost more if you vote against it. What kind of a discussion was that? We’re hoping that people take it more a little more seriously at that level than what we heard about here.
I think people will be watching to see whether a deal this large can be executed. I’m kind of skeptical about it myself. If not, then the next deal will not get approved. And I think the one big indicator people want to see now, they really want to see these two CEO’s bet the ranch on it. If they show up tomorrow and say give me a dollar a year and some escalated stock options, then I think that Wall Street will be behind them.
MARGARET WARNER: Roger McNamee what do you think the chances are of something like that happening?
ROGER McNAMEE: Well, I will tell you as an investor and somebody who owns a lot of stock, not any stock in Hewlett-Packard and Compaq, but deals like that indeed do provide a great signal about the future.
I have no idea what’s going on in the minds of Carly Fiorina and Michael Capellas. If they were to do that, though, I agree that that would be unbelievably warmly received by Wall Street. But that’s the kind of decision we can’t make for them; they’re going to have to make for themselves.
MARGARET WARNER: Steve Lohr, since you covered this whole industry, how are the other two big players looking on this? That is, Dell and Sun, and IBM, I should say three…
STEVE LOHR: IBM Is at the top and it is what Hewlett-Packard hopes to become, this large firm that can help corporations in particular adopt to the Internet era of computing. IBM has been silent. At the other end of this Michael Dell has said he’s overjoyed to see these two merge, because they’ll be wrapped up in their own efforts to integrate the operations in the corporate cultures of the two companies. And he thinks he’ll gain.
MARGARET WARNER: Roger McNamee, your thoughts on how the other competitors are looking at this?
ROGER McNAMEE: This is a brutal environment and every company out there is looking for whatever advantages are available and clearly to the extent that two huge players are merging, that keeps them focused on their own internal issues rather than on the needs of customers.
One of the greatest challenges of the combined Hewlett-Packard and Compaq is to stay competitive in this environment. And I think Steve has pointed o the big risk here and I think also, if you will to one of Carly Fiorina’s options; one of the things they could do if they chose to would be to split the printer business away from the computer business to allow the printer people to concentrate more fully on the opportunity in front of them and to fix the compute problem separately.
If they were to do that, that would be a very progressive and I think very clever way of both addressing the political issues raised by this battle and going after the competitive issues in the marketplace today.
MARGARET WARNER: All right Roger McNamee, Steve Lohr, Nell Minow, thank you all, very much.