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