Life after Ides of March...

Four days after the ‘Ides of March’, the world may see the birth of a

giant that will mark the turning point of the IT industry. But with dissidents

like company director, Walter Hewlett disputing the feasibility of such a

merger, the abyss shows no sign of closing. Walter Hewlett, waging a proxy

battle to stop HP from buying Compaq Computer, said the company could be worth

$14 to $17 more per share in 12 months without Compaq.

Walter

Hewlett contends that the deal is a low-risk, high return strategy. But HP

maintains that Hewett is quoting flawed economics. Walter, son of HP co-founder

Bill Hewlett, said in a filing with the Securities and Exchange Commission that

by focusing on high-margin growth businesses, ssHP had the potential to double

operating margins to 8.4 % from 4.2% by fiscal 2003.

The much-talked about HP-Compaq merger has been beset with obstacles ever

since the idea was born. With the intention of creating a global technology

leader, the protagonists have agreed to a $25-billion all-stock deal. The

combined company will have #1 worldwide revenue positions in servers, access

devices (PCs and hand-helds) and imaging and printing, as well as leading

revenue positions in IT services, storage and management software.

As per the agreement, Compaq shareowners will receive 0.63% of a newly issued

HP share for each share of Compaq, giving the merger a current value of

approximately $25 billion. HP shareowners will own approximately 64% and Compaq

shareowners 36% of the merged company. The transaction, which is expected to be

tax-free to shareowners of both companies for US federal income tax purposes,

will be accounted for as a purchase. The merger is expected to generate cost

synergies reaching approximately $2.5 billion annually.

The transaction is expected to add substantially to HP’s pro forma earnings

per share in the first full year of combined operations. Cost synergies of

approximately $2.0 billion are expected in fiscal 2003. Fully realized synergies

are expected to reach a run rate of approximately $2.5 billion by mid-fiscal

2004. These anticipated synergies result from product rationalization,

efficiencies in administration, manufacturing and marketing and savings from

improved direct distribution of PCs and servers.

By merging with Compaq, the new HP will become the market leader in servers,

storage management software (SMS), printing and imaging, and PCs, improving its

ability to offer end-to-end solutions. The closer you look, the merger appears

to be the single best bet for both players to strengthen and improve their

market positions. Since both companies share the conviction that advances in

technology, increased competition and changing customer requirements are rapidly

transforming the structure and economics of the information technology industry

in ways that demand quick and decisive action to remain competitive, they see

more than one reason to merge.

But the tide could turn either way. And the voting that will take place among

the shareholders on March 19 and 20 is sure to cause many a nervous breakdown!

The families and their foundations control more than 18% of HP’s stock, making

them a formidable voting block against the deal. And with Brandes Investment

Partners LP, the 14th largest shareholder, which controls about 18% of HP stock,

also deciding to cast its vote in favor of Walter Hewlett, the merger could face

a setback.

Both HP and Compaq are trying hard to woo the Institutional Shareholder

Services (ISS). ISS examines shareholder issues and advises institutional

clients on how to vote their share. With about 700 funds as its clients, ISS

could influence the vote of as much as 12 % of the shares of HP and Compaq,

including the 3% stake owned by Barclays Global Investors, which has asked ISS

to cast its vote.

Merrill Lynch noted that the families of Hewlett and co-founder David

Packard, control a significant block of HP’s stock, though far from a

majority. Merrill pegged the Packard stake at 10 %, but added that when and if a

shareholder vote does occur, it requires a majority of the shares voted to make

or break a deal, and not all shareholders will vote. But should either computer

maker pull out of the deal, the company could be on the hook for a $675 million

breakup fee, according to a regulatory filing made in September. Assuming that

the family members don’t change their opinions, HP will need two-thirds of the

remaining shareholders to support the deal. The most crucial decision for

shareholders will be which color card to mail back their vote on. Those who

favor the deal should fill out the white voting cards sent out by HP, and those

opposed to it, the green cards. Here’s hoping that HP hasmore white cards in

its kitty!

Dhanya Krishnakumar In New Delhi