Costs mount in HP proxy fight

A barrage of full-page newspaper advertisements, direct mailings, telephone calls and online ads have been unleashed in the past few weeks as the hotly contested merger proposal nears a climax. By the time shareholders cast their votes next Tuesday the total tab for opponents and proponents will likely top $100 million.

Leading the opposition to HP's $22 billion acquisition of Compaq Computer is Walter Hewlett, son of HP co-founder William Hewlett and a member of the company's board of directors. Hewlett says he is spending up to $32 million in his bid to defeat the deal.

HP has not disclosed its battle budget, but it appears to be at least double Hewlett's spending.

Proxy fight veterans say this could wind up being the costliest ever, topping recent contests such as a director battle at Computer Associates and a three-way hostile takeover battle among banking giants First Union, SunTrust and Wachovia.

"It's probably the most expensive ever, based on advertising," said Tom Ball, of proxy solicitation firm Morrow & Co., which was involved in the other two fights but is not involved in the HP-Compaq deal.

CEO Carly Fiorina recently told CNET News.com that whatever HP is spending, it is a small price to pay for something that is so critical to the future of the company. Still, the costs of battling for the merger could well eat into earnings for HP, which posted a profit of $635 million in the first quarter.

Merger-related advertising started slow, with an ad from HP in December that showed an early HP oscillator and asked readers "What if we had stopped here?" Walter Hewlett struck back in February, with an ad calling the deal a "$25 billion mistake."

Since then, the spat has erupted into a torrent, with HP putting out nearly daily ads in 15 major markets along with the national papers in an attempt to target the areas where a majority of its shareholders live. Ads from Walter Hewlett are somewhat less frequent and smaller, but still quite visible.

In fact, Hewlett's camp scored a small coup a few weeks ago in HP's hometown newspaper, the San Jose Mercury News. The front page of the paper's business section featured an interview with Fiorina, with the obvious topic being the benefits of the merger. The lengthy story jumped to an inside page--but on the facing page was a full-page ad from Hewlett arguing against the deal.

The ads in The Wall Street Journal, The New York Times, the San Francisco Chronicle and other dailies have gone from occasional to weekly to nearly daily as the March 19 vote draws near. Both sides have also expanded the number of newspapers they are running ads in, with Hewlett boosting efforts in which HP employees are concentrated and HP targeting the top 15 or so major media markets. HP has also launched two billboards in New York's Times Square and has started advertising on the Internet to push the deal.

Money talks
Walter Hewlett and HP are also spending a small fortune to deluge their shareholders with mailings and proxy cards, and millions more to call shareholders.

HP is not disclosing how much it is spending on advertising, mailings and phone calls. However, discussions with proxy veterans and people familiar with HP's advertising efforts put the overall cost of the campaign somewhere in the neighborhood of $70 million, with advertising accounting for nearly half the total.

Other costs for HP in the proxy battle include $1.4 million being paid to its two proxy-solicitation firms and an undisclosed amount of money in added legal bills from its outside counsel Wilson Sonsini Goodrich & Rosati.

On top of that estimated $70 million in battle-related costs, HP is paying $33.5 million to Goldman Sachs, its financial advisor for the deal. However, the Goldman Sachs relationship predates Walter Hewlett's opposition to the merger.

Walter Hewlett has pledged $12 million to its financial adviser, Friedman Fleischer & Lowe, but only if the deal is defeated.

Advertising is the biggest expense for HP, said Morrow & Co.'s Ball. Companies spend $5 to $10 per voter that they solicit by telephone, Ball said. All those green and white cards add up as well, with each mailing costing anywhere from $2.5 to $3 million, according to Hewlett's camp.

With HP having 900,000 shareholders to potentially call on, phone calls could be anywhere from $5 million to $9 million. HP's eight mailings thus far could cost in the range of $20 million to $25 million.

"Share owners have Walter Hewlett to thank for these expenses," said HP spokeswoman Rebeca Robboy. "If he had aired his concerns in the boardroom maybe we could have avoided this whole contest."

Hewlett's representatives have said they estimate HP's spending at $100 million to $125 million.

HP has said that figure is too high, and Robboy said it was disingenuous of Hewlett to criticize the amount HP is spending because, she said, much of it is being spent "correcting the misinformation from the Hewlett camp."

A representative for Walter Hewlett estimated the cost of his mailings at $12.5 million to $15 million and advertising at $3 million to $4 million. Because Hewlett's camp claims their overall budget is only $32 million that would leave only about $3 million to cover their proxy solicitation firm, attorney expenses, public relations, and the cost of calling shareholders, an amount that seems low, according to estimates from proxy industry veterans.

"Walter Hewlett is spending pennies compared to what HP is spending and the amount of stockholder value that is at stake," said Hewlett representative Todd Glass.

By any account, there has been a staggering amount of spending on the proposal, which analysts say is too close to call.

Other battles have also been expensive. Ball said that there was a similar amount of advertising in the fight among SunTrust, First Union and Wachovia. But there were fewer total shareholders to contact, meaning lower bills for mailings and calls. Ball worked on both that bank deal as well as the Computer Associates battle in which Texas financier Sam Wyly tried to wrest control of the software maker's board.

Ball said even in the highly public CA fight, the ad bills were a far cry from what HP is spending. "In two weeks they probably outstripped what we did in two months."