Hewlett-Packard Family Members Oppose Proposal to Acquire
Hewlett-Packard Attempts to Realign Its Strategy
On September 4, 2001, Hewlett-Packard (“HP”) announced its
proposal to acquire Compaq Computer Corporation for $25 billion in stock. The
proposed terms of the deal called for each Compaq share to be exchanged for one
share of HP common stock, providing a premium of 18% over the price of Compaq
common stock on the announcement date. The merger would produce a company with
total annual revenue of $90 billion, comparable in size to IBM. The proposed
transaction amounts to a renewed bet on the revival of the personal computer
business and on a new operating system for computer servers developed by Intel
and HP. HP’s CEO, Carly Fiorina, believed that the combined firms could achieve
annual cost savings of $2.5 billion within 2 years after closing. The combined
firms would have a $15 billion consulting business, with 65,000 employees in
consulting, support, and outsourcing. Together, HP and Compaq would not only
enjoy a dominant market share in printers, PCs, and storage devices, but they
would have the second-largest server business and the third-largest technical
services organization. The combination also would double the sales force to
15,000, giving HP access to firms of all sizes. The combined firms would have
two “cash cows” to fund future growth. These included the $9 billion ink
cartridge business, which churned out $2 billion in profits annually, and a computer
repair business generating annual profits of $1 billion.
Investors Are Unimpressed
Almost immediately, investors began to doubt the wisdom of
the proposal. The new company would face the mind-numbing task of integrating
overlapping product lines and 150,000 employees in 160 countries. The concern
seems to have centered on the lack of a precedent of a merger in the technology
industry of this size having been successful. Critics noted that many of
Compaq’s financial problems stemmed from its inability to effectively integrate
its 1998 purchase of Digital Equipment. Moreover, HP would have to pour money
into research and development and consulting to take on IBM, EDS, and others in
the services market. Reflecting these concerns, the value of the proposed
merger had sunk to $16.9 million within 30 days following the announcement, in
line with the decline in the value of HP’s stock.
A Lack of Solidarity among HP Shareholders Threatens the
In November 2001, Walter Hewlett and David Packard, sons of
the cofounders, and both the Hewlett and Packard family foundations came out
against the transaction. These individuals and entities controlled about 18% of
HP’s total shares outstanding. Both Carly Fiorina and Michael Capellas,
Compaq’s CEO, moved aggressively to counter this opposition by taking their
case directly to the remaining HP shareholders. HP management’s efforts
included a 49-page report written by HP’s advisor Goldman Sachs to rebut one
presented by Walter Hewlett’s advisors. In its report, HP contended that the
combined companies could achieve operating margins on a consolidated basis and
for the PC business of 10.9% and 3.9%, respectively, by the end of fiscal 2004.
HP also began advertising in national newspapers and magazines, trying to convey
the idea that this deal is not about PCs but about giving corporate customers
everything from storage and services to printing and imaging.
HP Shareholders Narrowly Support the Merger
On March 23, 2002, HP declared victory in the proxy fight,
as shareholders approved the takeover of Compaq by a vote of 838 million for
(51.4% of the total vote) and 793 million against (48.6% of the total vote).
This slender 2.8 percentage point margin of victory was among the smallest in
history. The preliminary vote count was open to a review and challenge period
before IVS Associates, a proxy counting firm, could certify a final count.
Hewlett Goes to Court
In a lawsuit filed on March 28, 2002, Hewlett claimed that
HP had coerced and enticed Deutsche Bank, a major company shareholder, to
change its votes to favor the merger after HP set up a multibillion-dollar
credit facility that included the bank. He also accused HP of misleading
shareholders about the status of its integration plans. The legal wrangling
finally came to a close at the end of April when a Delaware Chancery Court
judge dismissed the lawsuit.
The Legacy of the Hewlett/HP Proxy Battle
HP finally was able to purchase Compaq on May 7, 2002, for
approximately $19 billion, after an 8-month proxy fight. In the short run, the
delay in integrating the two firms probably resulted in the defection of some
key employees, the loss of some customers and suppliers, the expenditure of
millions of dollars of shareholder funds, and widespread angst among
shareholders. In the long run, the outcome of the court battle helps to define
what management can and cannot do in persuading shareholders to vote in their
favor. To avoid a court fight, management must maintain an arms-length
relationship in its dealings with those shareholders over which it may appear
that they have undue influence. Moreover, management must be diligent in
assuring the complete accuracy of statements communicated to shareholders.
However, what may be more telling is the supposed independence of the various
parts of Deutsche Bank. Although the judge exonerated HP executives, he
expressed serious concern about the potential conflicts of interest at Deutsche
Bank in how it decided to swing 17 million votes in HP’s favor just before the
vote. The judge also raised questions about the “ethical wall” that supposedly
separates Deutsche Bank’s asset management divisions from its commercial lending
division. While HP CEO, Carly Fiorina, won the proxy battle, she ultimately
lost the war with the sons of the co-founders of the firm. Despite significant
growth in revenue, operating profits fell far short of what had been promised.
Actual fiscal 2004 operating margins were 6% on a consolidated basis and .9%
for the PC business. HP’s share price had fallen by almost 60% from its
pre-merger high. On Februrary 7, 2005, Ms. Fiorina was ousted as HP’s Chief
Executive Officer by the firm’s board of directors.
Case Study Discussion Questions
1. Discuss the pros and cons of the proposed transaction.
Which side would you support?
2. Explain why management rarely loses proxy contests. In
your judgment, should the rules that govern proxy contests be changed? If so,