Hewlett-Packard Family Members

question 76

Essay

Hewlett-Packard Family Members
Oppose Proposal to Acquire Compaq

On September 4, 2001, Hewlett-Packard (“HP”) announced its proposal to acquire Compaq Computer Corporation for $25 billion in stock. 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. 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.

In November 2001, Walter Hewlett and David Packard, sons of the co-founders, 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, HP’s CEO, 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. 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.

After winning a hotly contested 8-month long proxy fight by a narrow 2.8 percentage point margin, HP finally was able to purchase Compaq on May 7, 2002, for approximately $19 billion. However, the contentious proxy fight had lingering effects. The delay in integrating the two firms resulted in the defection of key employees, the loss of customers and suppliers, the expenditure of millions of dollars, and widespread angst among shareholder.
-In view of the dramatic decline in HP's stock following the announcement, why do you believe Compaq shareholders would still vote to approve the merger?

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Definitions:

Amps Flow

The rate of electrical current measured in amperes (A) flowing through a conductor or circuit.

Cathode

The electrode through which electrons leave an electrical device or where reduction reactions occur in an electrolytic cell.

Current Flow

The movement of electric charge through a conductor, typically measured in amperes.

Series Circuit

An electrical circuit in which components are connected end-to-end, forming a single path for current flow.