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It's the Scion vs. the Board in Merger Fight

February 4, 2002

By STEVE LOHR




The dispute over Hewlett-Packard (news/quote)'s plan to buy
Compaq Computer (news/quote) tends to be personalized as a
confrontation of two individuals: Carleton S. Fiorina
pitted against Walter B. Hewlett. But the real break is
between Mr. Hewlett, a son of the co-founder and a director
of Hewlett-Packard, and the rest of the board.

Mr. Hewlett, in an interview last week, said he was
doubtful the first time that Ms. Fiorina, the chief
executive of Hewlett- Packard, raised the possibility of
acquiring Compaq at a board meeting last May. His qualms
only increased over time and upon further examination. In
November, two months after the deal was announced, Mr.
Hewlett declared his opposition to the merger plan, and he
began leading a proxy fight to scuttle the deal.

In interviews, other members of the board said that when
the idea initially arose, they shared some of Mr. Hewlett's
skepticism. "We all had reservations," said Richard A.
Hackborn, a former executive vice president of
Hewlett-Packard and a board member. "None of us was
convinced that Compaq was the exact right answer at the
start."

Yet in board meetings leading up to the merger announcement
in early September, and even more so in the months since,
they say, they were convinced that it was. The strategy
behind the merger plan, they say, is sound and the
execution challenges of blending two disparate companies
and corporate cultures into a smooth-running enterprise,
while daunting, can be overcome.

To be sure, the dynamics of communication in corporate
boards are typically shaped by management. So management
proposals generally carry the day.

Still, the nine-member Hewlett-Packard board has seven
outside directors and only two company executives, Ms.
Fiorina and Robert P. Wayman, the chief financial officer.
The board includes current and former chief executives of
major companies, the former head of the White House Office
of Science and Technology Policy and the chief executive of
a large investment fund.

Most of them joined the board before Ms. Fiorina came to
Hewlett-Packard in 1999. It is not her hand-picked board.

The decision to acquire Compaq could be a mistake - as Mr.
Hewlett, many investors and industry analysts believe - but
it was a decision that was carefully weighed by an
experienced board with substantial business experience.

The strategy behind the merger is driven by the perception
that Hewlett-Packard needs to make a big step in its
computing business to become a full-service supplier of
hardware, software and services to corporate customers.

To George A. Keyworth II, the former White House technology
adviser and longtime Hewlett-Packard board member, the
underlying problem is that the company has never really
made the transition from an electronic instruments company
to a fast- paced computer company. The major
entrepreneurial exception to the pattern, Mr. Keyworth
says, is the computer printer business, which was built by
Mr. Hackborn, another board member who strongly supports
the Compaq merger.

"Very good people have tried to transform this company
through organic growth, targeted acquisitions and the old
way," said Mr. Keyworth, who is now chairman of the
Progress and Freedom Foundation, a policy research group.
"I believe, and this board believes, we have to take a big
step."

The big step is to become the leader in bringing the
lower-cost technology of industry-standard microprocessors,
Microsoft (news/quote)'s Windows and the Linux operating
systems into data centers, where corporations handle their
most important computing chores. The Hewlett-Packard
strategy, teaming up with Compaq, is to make those
computers and also sell software and services to solve
business problems. The plan, if executed, would carry the
company firmly into I.B.M.'s stronghold.

"The future for H.P. is to be the supplier of truly
cost-effective solutions, compared with I.B.M.
(news/quote)," said Sam Ginn, retired chairman of Vodafone
(news/quote) AirTouch, which operates Europe's largest
mobile phone network.

The challenge of successfully integrating two large
companies without losing ground in the fleet-footed
computer business is considerable. But the board does have
veterans of several big corporate mergers. Philip M.
Condit, the chief executive of the Boeing Company
(news/quote), who directed the $14 billion acquisition of
McDonnell-Douglas in 1997, is encouraged by the integration
teams set up at Hewlett-Packard and Compaq since the deal
was announced.

"The key to making a big merger succeed is to plan it, plan
it, plan it, and then execute," Mr. Condit said. "You can't
just let it happen. You have to create a new company, not
separate pieces of the old companies."

In the board meetings since the deal was announced, Mr.
Condit said, he had been impressed because "the kinds of
disciplines are in place that are needed."

The merger plan is "certainly not without risk," he added.
"But I think the opportunity outweighs the risk."

Robert E. Knowling Jr., a former Ameritech executive who is
chairman of Internet Access Technologies, acknowledged he
was "neutral" to the idea of the Compaq merger when the
idea came up in May. But he said that he came to view the
move as a way to strengthen Hewlett-Packard's competitive
position in heavy-duty computing, against its rivals I.B.M.
and Sun Microsystems (news/quote) and to consolidate and
streamline the personal computer operations of both
Hewlett-Packard and Compaq to better compete against the
industry leader, Dell Computer (news/quote).

Though he now supports the merger, Mr. Knowling observed,
"It is a risk, obviously."

Far too great a risk, insists Mr. Hewlett. He is confident
that his view will prevail, and that the merger proposal
will be defeated when shareholders vote, probably in March.


Mr. Hewlett has remained on the Hewlett- Packard board and
attended board meetings, despite his public break with his
fellow directors and his campaign against the Compaq
merger. There have been no shouting matches or cross words,
he said.

"The board meetings have been conducted in a very
professional way, and I think it's very important that
continues," Mr. Hewlett said. "When this deal is turned
down, the board is going to have to go back to the drawing
board and get H.P. back on track."

http://www.nytimes.com/2002/02/04/technology/04HEWL.html?ex=1013831778&ei=1&en=43ff7a6db9681527



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