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Consultants hold key to HP-Compaq merger

Advisers meeting with the David and Lucile Packard Foundation board are expected to greatly influence how HP's single largest shareholder will vote on the merger.

Advisers to the David and Lucile Packard Foundation are scheduled to meet with the organization's board Friday to discuss the merits of Hewlett-Packard's proposed merger with Compaq Computer--a meeting that's expected to greatly influence how HP's single largest shareholder will vote.

Consulting firm Booz-Allen & Hamilton, which advises the Packard Foundation, is scheduled to give an update and possibly a final report on the HP-Compaq merger, which was first announced in early September.

The foundation, which holds a 10.4 percent stake in HP, is expected to vote on the issue anytime between Friday and early January, said George Vera, the foundation's chief financial officer. HP executives are also meeting with foundation board members this week.

Analysts say the foundation's vote may determine the success of the merger, which has already seen opposition from several members of both the Hewlett and Packard families.

Walter Hewlett, son of co-founder William Hewlett and an HP board member who initially voted in favor of the deal, plans to vote against the merger--as do his sisters, his family foundation and trust. The Hewletts hold a 6.6 percent stake in the company.

David Packard, son of HP co-founder David Packard, said his own foundation, the Packard Humanities Institute, plans to vote its 1.3 percent stake against the deal.

These two family groups represent roughly a 7.9 percent stake in HP. If you add a "no" vote by the Packard Foundation--with its 10.4 percent stake--and assume that 25 percent of individual shareholders who vote will oppose the deal, then the company will need a whopping 61 percent of institutional investors to vote in favor of the deal for it to pass, estimated Joel Wagonfeld, an analyst with Banc of America Securities.

But should the Packard Foundation vote in favor of the deal, then only 42 percent of institutional investors will need to approve the deal, Wagonfeld said.

"As can be seen, the Packard Foundation's vote will have a significant impact on the outcome," Wagonfeld said in a recent report.

In addition to three Packard sisters, the 12-member Packard Foundation board includes former HP CEO Lew Platt and former Chief Operating Officer Dean Morton.

Booz-Allen has sat in on presentations to the Packard Foundation board by HP, Compaq and advisers to Walter Hewlett.

Although Booz-Allen has not released details of its HP-Compaq merger review, industry watchers can get a glimpse into the firm's thinking via a general report on mergers released four months ago titled, "Merger Integration: Delivering on the Promise." The report evaluated 78 mergers worldwide with a value of $1 billion or more that closed in 1997 and 1998.

"Post-merger integration is one area where we have done considerable work and have developed intellectual capital related to that," a Booz-Allen representative said. He declined to draw parallels between the report and the work underway for the Packard Foundation. Nonetheless, the merger-related report may provide a glimpse into the general issues considered.

Strategic mergers designed to add capabilities or create a new business model had a 32 percent success rate, while mergers to achieve scale or grow existing businesses had a 55 percent success rate, according to the report, which was released in August.

Building a PC powerhouse
Analysts have described the multibillion-dollar merger between HP and Compaq--one of the largest in technology history--as a merger of equals. Although the merger may face challenges for that fact alone, the purpose of the merger falls into the more favorable category of achieving scale and growing existing business, analysts said.

Before the deal closes, the Booz-Allen report stresses, the chief executive of the surviving company needs to address four principles: Communicate a shared vision; seize defining moments to make choices and trade-offs; simultaneously execute against critical imperatives; and use a rigorous integration planning process.

Under the first principle of communicating a shared vision, the CEO needs to provide goals for what the merged company will become and issue marching orders to the new management team so they can set up priorities for integrating systems, people and processes, according to the report.

"Both companies' senior teams need to understand and support the vision...then walk the talk," the report stated.

Since the merger announcement, HP CEO Carly Fiorina has touted the benefits and cost savings the merged company can achieve. Analysts, however, are skeptical.

Bill Shope, an analyst with ABN AMRO, noted that "HP and Compaq have a shared vision, but that vision doesn't necessarily become more realistic with the merger. Carly's ability to communicate the vision is strong. But it has become more defensive and argumentative as negative opinions by the investment community have confused the message."

A second principle calls for seizing moments to make choices and trade-offs, such as, what is needed to preserve the potential of the merger and what the CEO is prepared to relinquish. Questions that CEOs need to resolve include the merger's structure: Will the company take the best-of-both approach for management or let one company dominate?

The third principle calls for juggling seven critical areas during the merger integration process: communicating a shared vision of what is to be accomplished; creating one company culture, which is different from either company's culture; building enthusiasm among shareholders, customers, suppliers and employees; creating an enthusiastic integration team by showing the members what's in it for them via career prospects and financial upsides; deliver on the short-term synergies in six to 12 months after the deal is closed; maintain stable operations; and, finally, close the deal.

Analysts note one of the easiest targets of the seven points is achieving short-term synergies within 12 months.

"These are very similar companies and have many redundancies that can be dealt with very soon. For example, you don't need two Unix or NT development teams," said George Elling, an analyst with Deutsche Banc Alex Brown.

Although HP is already laying the groundwork for creating one culture that will blend HP's old values of teamwork and trust with Compaq's accountability culture, the company has yet to demonstrate that it has tackled such areas as maintaining everyone's enthusiasm, analysts said.

The fourth principle, meanwhile, of using a rigorous integration planning process calls for creating a separate team that focuses on the future organization and how to transition from the current two-company arrangement.

"All teams should be staffed with full-time stars rather than part-time understudies, and these individuals should be given tasks with specific and tangible objectives," the report states. In addition, the team members should be free from their normal daily duties.

HP's integration team is assigned to the task full time, with a central team collecting critical information from smaller business and function teams. Although the team is coordinating the creation of the new company, U.S. antitrust laws prohibit the use of a merger-related business plan before it officially closes. The company expects the deal to close in late February at the earliest.

Although the Booz-Allen merger integration report could serve as a plan of action for HP, the company declined to specifically comment on whether Fiorina and other top executives have reviewed its contents.

"We are drawing on the best practices on merger integration from our advisers, other industry expert research, and lessons derived from both companies' experiences," said Rebecca Robboy, an HP spokeswoman.