Institutional shareholder backs merger

After days of increasingly heated rhetoric between Hewlett-Packard Co. and opponents of its planned merger with Compaq Computer Corp., the company caught a break this week as Alliance Capital Management Holding LP became the first major HP institutional investor to go on the record supporting the merger.

Alliance Capital’s intention to vote its shares in favour of the merger, first reported by the Wall Street Journal, was confirmed in filings submitted Tuesday and Wednesday by HP and Compaq with the U.S. Securities and Exchange Commission (SEC), and gives HP a small but influential addition to its base of support for the deal.

While Alliance Capital, which held 21.3 million shares of HP as of Sept. 30, according to the Journal, owns only around 1 per cent of HP’s outstanding stock, its support may help reassure nervous institutional investors. Few have been willing to comment publicly on which way they intend to vote.

HP still faces a tough battle to win the support of its shareholders over the objections of the Hewlett and Packard families, which control around 18 per cent of HP’s shares through their foundations.

Compaq and HP recently set Jan. 28 as the date by which shareholders must own stock to vote on the merger proposal at special shareholders meetings. Dates for those meeting have not yet been set.

HP and Walter B. Hewlett, son of HP co-founder William Hewlett and de facto head of the families’ proxy bid to defeat the merger, continued to trade barbs over the past few days through ads, mailings and other communications recorded in SEC filings. Hewlett sent a letter to HP shareholders last week suggesting that HP would be drastically overpaying for Compaq and alleging that HP’s stockholders have lost US$9.5 billion relative to an index of comparable companies in the four months since the merger was proposed.

“No significant combination involving a computer company has ever met expectations,” he wrote. “While the proposed merger with Compaq would make Hewlett-Packard much bigger, we believe the company would be less focused and more troubled.”

HP fired back with a “merger communications toolkit” disseminated to HP managers, containing point-counterpoint-style rebuttals to “perceptions” about the merger.

Rather than increasing HP’s exposure to the slumping PC business, the merger will give HP the volume and scale necessary to optimize its supply chain and drive manufacturing costs down, making it better able to compete with Dell Computer Corp., the company said. It will also increase the customer base to which HP can market its printing products, and give HP a more balanced portfolio of businesses, HP said. Critics of the merger have charged that it will dilute HP’s lucrative printer business.

HP also instructed its managers to “acknowledge the anxiety and fear that employees may be feeling regarding the merger.” HP has estimated that 15,000 jobs will be cut after the merger. Managers should tell their staff that layoffs will be gradual, occurring 18 to 24 months after the merger’s close, HP said. “The last workforce reduction taught us what we can improve about the selection process going forward,” the company wrote.

Hewlett-Packard, located in Palo Alto, California, can be reached at +1-650-857-1501 or online at

Compaq, in Houston, can be reached at +1-281-370-0670 or

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