Packard Foundation Opposes HP-Compaq Merger

Board members of the David and Lucile Packard Foundation, an influential Hewlett-Packard shareholder, voted Friday to oppose the proposed merger between HP and Compaq, a move that could potentially sink the $25 billion deal, according to some analysts.

In a statement Friday, Susan Packard Orr, chair of the Foundation, said that "the best interests of the Foundation would be better served by Hewlett-Packard not proceeding with the proposed transaction."

The preliminary decision means that the Foundation will oppose the merger when it goes to a final vote at HP's annual shareholder meeting. A date for that meeting hasn't been set, though industry experts expect it to take place in February.

Effect Uncertain

For users, the potential impact of the merger remains unclear. The firms oversee a vast portfolio of products ranging from PCs and printers to enterprise-class servers and storage systems. Some overlapping products will be discontinued if the merger goes through, although the companies have yet to spell out which ones they plan to ditch.

Analysts have said their respective server operating systems, Compaq's Tru64 and HP's HP-UX, are unlikely to exist side by side for long if the merger goes ahead, leaving businesses who use those platforms temporarily unsure about their future.

In a joint statement issued late Friday, HP and Compaq said they will forge ahead with their merger plan despite the lack of support from the Foundation and other family members.

"We are disappointed by the Packard Foundation's preliminary decision," the companies said. "Nevertheless, our responsibility to shareowners, customers, and employees requires that we maintain a pragmatic view of the business and a focus on the future."

The companies also said they will continue to educate shareholders about what they see as the merits of the deal in an attempt to sway opinion in their favor.

Sizeable Vote

Board members, which include children of HP co-founder David Packard, met Friday to determine their position on the proposed merger. They were scheduled to hear a presentation from consulting firm Booz, Allen & Hamilton, an adviser to the Foundation.

Board members had also been briefed by HP executives who support the merger and Friedman Fleisher & Lowe LLC, a consulting firm commissioned by merger opponent Walter B. Hewlett, son of HP's co-founder, to research the proposed deal.

The Packard Foundation owns a 10.4 percent stake in HP and is considered by many to hold the swing vote in the merger. Analysts have said that how the Foundation sides could have a profound effect on whether the deal goes through. The companies announced their intention to merge in September.

"We do believe that the Foundation's vote will ultimately determine the outcome of the merger," said Toni Sacconaghi, senior analyst with Sanford C. Bernstein & Co. in New York, in a research note Friday. Based on how the merger is expected to pan out for the two technology giants, Sacconaghi said "a no vote on the proposed deal is the 'safer' bet" for the Foundation.

Most importantly, he said, opposition from the influential group would help HP's stock price, which has fallen since the deal was first announced.

Proposal Studied

The Foundation did much research in preparation for its vote Friday, making it harder for backers of the deal to argue that it would benefit both companies, said Rob Enderle, an analyst with Giga Information Group.

"Clearly the Foundation did its homework," Enderle said. "It makes it very difficult now for HP executives to go back and say 'you don't fully understand this.' "

Already, family members of co-founder William Hewlett have come out in opposition to the deal. Walter Hewlett filed papers with the U.S. Securities and Exchange Commission Wednesday highlighting the poor financial performance of the two companies since the merger was first announced.

Eleanor Hewlett Gimon and Mary Hewlett Jaffe, and The William R. Hewlett Revocable Trust, also have voiced opposition to the merger. So has David Packard, the son of company's co-founder.