HP-Compaq merger faces stiff opposition from shareholders stock prices fall again


Published September 5, 2001

The Los Angeles Times

Shareholders of Hewlett-Packard Co. and takeover target Compaq Computer Corp. are so displeased with the planned acquisition that they might take the extreme step of rejecting the deal, investors and observers said yesterday.

Stock in both companies fell for the second day since the deal was announced, with HP declining 66 cents yesterday to $18.21 and Compaq dropping 67 cents to $10.41.

HP has now lost 22 percent of its value since announcing it would buy rival computer maker Compaq for $25 billion in HP stock. Compaq"s shares are off more than 16 percent. The proposed deal is now worth less than $20 billion.

"Most people who are against the deal are voting with their feet" by selling their shares, said HP investor Thomas Rath of Safeco Asset Management Co. in Seattle. "We don"t like what it does to the business mix."

Compaq is already unprofitable in the PC business and the company is losing ground to market leader Dell Computer. Analysts also complain that it could take two years of cost-cutting and reorganization before HP shows any benefit from the deal.

The HP-Compaq deal does not have a minimum price, or "collar," where either party can walk away if the shares continue to fall. The terms call for each Compaq share to be exchanged for 0.6325 shares of HP.

But if either company changes its mind about the merger they must pay the other $675 million.

"There is an outside possibility that unless both companies are able to articulate the story better and convince the investment community," a majority of shares will be voted against the transaction, said chief investment officer David Katz of Matix Asset Advisors in New York. That company owns 960,000 Compaq shares and 444,000 HP shares and opposes the deal.

Ordinarily, even shareholders who don"t like the terms of an acquisition vote to approve it, especially when no other deal is on the table.

Five years ago, Kansas City Power & Light Co. shareholders rejected the company"s plan for a friendly merger with UtiliCorp United Inc.

And last year, Crown Central Petroleum shareholders rejected a proposed takeover of Crown by Rosemore Inc., though a higher offer was in the wings.

After a deal is announced, some long-term investors sell to arbitrageurs, who take the small risk that the deal won"t close and generally root for the takeover.

And a stock price drop after a planned merger"s announcement may be only partially due to disagreements on the deal"s benefits. The rest of the decline may be due to investors digesting the outlook by the two managements that led them to approve the union, said Stanford University law professor Joseph Grundfest.

If a takeover does fall apart, typically only the first piece of the stock decline is reversible, Grundfest said.

But a continuing decline in market value can be too big to ignore.

That happened last year when HP was in talks to acquire the consulting business of PricewaterhouseCoopers for more than $17 billion. HP shares sank so much on news of the discussions that HP walked away. The two companies hope to close the deal in the first half of next year. By then investors may view the unpopular merger as their last and best hope.

HP Chief Executive Carly Fiorina spoke at an investor conference in Boston on Wednesday and will continue making the rounds to shore up support for buying Compaq.

"These companies fit like a zipper," Fiorina said at the conference. "This combination is clearly a creator of shareowner value."