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A bundle of trouble if HP merger fails

A split investor community. Bad blood in the boardroom. The departure of Carly Fiorina. These are only some of the issues HP may face if its merger with Compaq doesn't go through.

If integrating two large technology companies seems like a daunting task, try going it alone after you've repeatedly told shareholders, investors and employees about the importance of such a merger.

See special coverage: A Fight to the Finish That's the dilemma facing executives of Hewlett-Packard and Compaq Computer as shareholders get the final say after months of acrimony between merger proponents and opponents. HP shareholders meet Tuesday, followed by Compaq investors Wednesday, although the results may not be known for days or weeks.

The stakes are perhaps highest for HP, which, in the face of blistering opposition, has been forced to repeatedly justify its plans to acquire Compaq for some $21 billion in stock. Compaq, by contrast, has been able to maintain that the merger is a good development but that the company is also well-positioned on its own.

Should shareholders nix the merger plans, HP will have numerous issues to deal with that could prove more intractable than actually completing the merger. Topping the list is the outlook for CEO Carly Fiorina. In addition, the company will need to deal with a split investor community, bad blood in the boardroom, an anxious work force and unclear business objectives.

As for Fiorina, a number of HP employees and dissident HP director Walter Hewlett have speculated that she will resign. After all, they point out, this would mark her second failed merger attempt. Last year the company dropped plans to acquire the consulting business of PricewaterhouseCoopers

Hewlett, who launched an opposition campaign against the merger last November, has even advocated that Fiorina step down, arguing that she will no longer be effective in her role carrying the baggage of a failed merger.

"Either she gets pushed out by the board or she could come to the board and say that she's been compromised in the eyes of her management team and would like to do something else in the next six months," said Jon Holman, founder of executive recruiting company The Holman Group. "That would allow for an orderly transition and search for a new CEO."

The case against the merger
According to dissident Hewlett-Packard board member Walter Hewlett, merging with Compaq will:

• Increase HP's exposure to the commodity PC business

• Dilute its profitable printing and imaging business

• Hurt HP's share price

• Add risk to the company, since most large tech mergers fail

But Fiorina may surprise everyone. Even if the merger fails, she may just stick it out, said one source familiar with the company.

"She has to decide if she can continue to do her job with credibility. If the merger is narrowly defeated, she may find she can still do her job," the source said. "But if it's a substantial defeat, or if the press and Wall Street continue to focus on her even with a narrow defeat, she may decide it's a bad situation. If she leaves, it will be her choice. The board, with the exception of Walter, still supports her."

A replacement CEO would also be faced with leading a company where its founding families have played a tremendous role in its direction.

Board seats up for grabs?
Speculation about HP's course should the merger fail extends from the corner office to the boardroom. The board of directors has had an increasingly hostile relationship with fellow director Hewlett as the fight has dragged on.

In some of their most recent comments on their future role on the board, HP directors Sam Ginn and Phil Condit said they have not made a decision, but if they should leave, they would seek out replacements and ensure an orderly transition.

But one source familiar with the company said a number of directors have discussed remaining on the board, even if the deal is defeated, given Hewlett's recent proposal of wanting to spin off HP's lucrative printing and imaging business. Some of the directors were disturbed enough by those comments that they want to remain on the board to ensure that does not happen, the source said.

Hewlett's own role has also been debated, even though he has single-handedly turned a likely slam-dunk merger into a horse race. Steven Currall, associate professor of management at Rice University, said Fiorina "would be wise to try to integrate Hewlett. I think it would be a mistake for her to try and get him kicked out from the board."

And what will be the fate of the roughly 88,000 HP employees should the deal falter? In past interviews, Fiorina has stated that layoffs can be anticipated whether or not the merger is approved.

If the merger is approved, the company has said that 15,000 positions would likely be cut. But if the merger is voted down, Fiorina has said the risk exists that just as many jobs could be axed.

"We have competitive cost structures and we have many employees who are working in (HP) businesses that are losing money and not sustainable," said Rebeca Robboy, an HP spokeswoman.

The pulse of employees
Some employees say layoffs would be easier to take should the merger be defeated.

"Merger or not, layoffs are always hard to swallow. But I suspect that most employees would feel some sense of achievement at having foiled management's devious plans," said one HP employee.

Several employees said HP would have an easy time moving forward with a unified work force should the deal fail. Said another employee who asked not to be named: "Employees are not pitted against each other...There's not a great deal of tension where I work, mainly because most of us are against the deal, or, at best, on the fence. I know of two or three people who are enthusiastic for the deal and we just ignore them."

Employees who are against the deal will likely return to the level of motivation they had before the merger was announced, but do not expect them to be enthusiastic, said Philip Barquer, president of consulting firm HR Alternatives in Newport Beach, Calif.

"Carly has put so many eggs in one basket. She has told employees and the public it is critical for HP to acquire Compaq for the company to be a success going forward," Barquer said. "If it doesn't happen, how will she tell her team how HP will recover? In order for her to motivate employees from second gear over the past six months to up-shift into fifth gear, she needs to come out with a new plan and how to meet those objectives."

Without the merger, analysts and two HP directors offered some thoughts on what would be needed to move the company forward.

Hewlett has advocated returning to earlier board discussions about spinning off its printing and imaging business.

Dan Niles, an analyst with Lehman Brothers, said he would not be surprised to see HP become more of a printing and imaging business, and for the PC business to shrink.

Needham's Wolf said spinning off the printing business may help unlock shareholder value, but it does not necessarily mean the printing operation will perform better as a separate company.

Both analysts note that HP may once again pursue acquisitions in the professional services business, which was one component it had hoped to expand its presence in with the Compaq merger. But one HP director, who requested anonymity, offered a different perspective.

"We had looked at consulting two years ago, when it was a growing business. But now, outsourcing is growing and consulting is not," the director said. "I plan to recommend (to the board) we look at parts of Compaq's business that they might be interested in selling if the merger does not go through."'s Ian Fried contributed to this report.