Behind the turmoil on HP's board

Last week, Hewlett shocked many investors, analysts and HP executives by announcing that he would vote his shares against the merger. But to insiders, Hewlett's move was no surprise--he skipped a key meeting four months ago to discuss the largest merger in the technology industry.

Contacted in July about the added importance of a previously scheduled board meeting, Hewlett responded that he had plans to perform in an orchestra at the exclusive Bohemian Grove in Monte Rio, Calif., according to a source familiar with the board's actions.

"Everyone was told it was important and that the board would be making a decision to go forward or not to go forward" with the Compaq deal at the regularly scheduled meeting, the source said. "The board spent six to seven hours discussing the merger Thursday, and on Friday (Hewlett) showed up for the formal part of the meeting where standard, operational issues are discussed."

Hewlett was scheduled to perform July 19 with the Bohemian Club Symphony Orchestra, which performs along the man-made lake within the private, 2,700-acre Bohemian Grove about 70 miles north of San Francisco.

The performance was part of the annual summer event, which ran July 13-28, according to the Bohemian Action Network, a group that is critical of the club.

The all-male Bohemian Club comprises rich businessmen, politicians and some influential artists. Past summer gatherings have begun with some attendees donning red-hooded robes and cremating a coffin effigy at the base of a 40-foot owl, said Action Network representative Mary Moore.

Hewlett, through a spokeswoman, declined to comment.

Until last week, Hewlett was largely a background figure at HP. He thrust himself into the controversy over the HP-Compaq merger by publicly opposing the union, the only HP or Compaq board member to do so. David Packard, son of HP's other founder, also opposes the merger, but he is not a board member.

HP took the industry by surprise in September when it announced it would acquire Compaq in a stock swap valued around $25 billion. The deal would mark one of the largest technology mergers in history and would put two big brand names together in an attempt to give greater competition to IBM.

Although the companies have touted the complementary benefits of the merger, from products to cost-savings, Wall Street has largely panned the deal. Since it was announced, the value has fallen to around $20 billion due to a decline in the value of HP and Compaq shares.

While Hewlett's opposition is not enough to derail the deal, it has further raised concerns that were already building among many investors and analysts--not to mention creating ill will among his fellow board members. Because of Hewlett's decision, some analysts speculate that the merger could be tarnished by an ugly and public tug-of-war.

Although some investors oppose the deal, others are concerned that if the deal crumbles the company could be in worse shape because of an expected loss of top executives and credibility. HP Chief Executive Carly Fiorina, in particular, would likely quit if the merger fails, said a source familar with the board.

The high stakes have put a spotlight on Hewlett's actions, which are unusual because he privately voted with the board, then voiced his opposition through a publicly issued press release.

"Historically--we've seen from a consistency sake--a board member will typically oppose an issue inside and outside the board room, rather than approving something inside the board and then opposing it on the outside," said Patrick McGurn, director of corporate programs for Proxy Monitor. "Typically, we've also seen if a director doesn't like what's going on, they will quietly resign in the midst of things."

A simmering rift
Although Hewlett aired his concerns last week, the rift between him and the rest of HP's board has been simmering since the deal's early days.

After missing the first day of the key two-day meeting, Hewlett listened on the second day as each of the board members explained their reasons for supporting the merger.

"When it was his turn, he said he was against it," the source said. "He said he didn't like the PC business and felt we were trading a printer business for a PC company."

When the other board members queried Hewlett, many of the reasons he cited were issues that were discussed during the previous day's two-day meeting, the source said. "A lot of the board members felt he should have been at the meeting the day before and was wasting their time."

Joele Frank, a spokeswoman for Hewlett, declined to comment on deliberations by the board of directors or on board meetings.

Rebecca Robboy, an HP spokeswoman, declined to comment on the board meetings and director discussions.

After the board meeting and some time had passed, Hewlett eventually agreed to vote for the merger. But the source noted that he indicated at the time of his vote "a willingness to vote in favor of the merger" but that he also said the vote "did not indicate he would vote his shares in favor of the deal."

Such comments can put a director on a slippery slope, McGurn said.

"A director is supposed to vote in favor of what they feel will be the best long-term solution for a company. It's hard to reconcile those two actions," McGurn said. But he noted there may be special circumstances in which a director's personal investment horizon, or portfolio, may dictate different actions.

Despite Hewlett's antipathy toward the merger, his family's 5.2 percent stake in the company, and the power that the Hewlett family name bears in the industry, the board felt comfortable moving ahead with the merger. Last week, after news of Hewlett's opposition, the boards of both companies publicly re-endorsed the deal.

All in the timing?
Hewlett's actions last week came largely as a surprise. "The board never thought he would try to multiply his 5.2 percent stake. He called the board members about a half an hour before the press release went out; it was a token gesture and was long after the point of no return," the source said.

The timing of the objection also precedes another key date: HP is preparing to file a proxy outlining the benefits and risks of the deal with the Securities and Exchange Commission.

"Walter knew when the proxy would be released and knew when a public relations campaign would be most effective. He's doing this right before the proxy comes out," the source said.

But Frank, who handles public relations for Hewlett, said the two events were not linked.

The public statements were released Tuesday because that's when the independent financial advisers hired by the Hewlett family foundation to review the merger had returned with their decision, she said. Hewlett has hired proxy solicitation firm MacKenzie Partners to explore his options.

Should other major investors join Hewlett and scuttle the deal, the likelihood that some HP board members, Fiorina and other executives will quit is high, the source said.

"I don't think Walter has thought this through," the source said. "None of the directors except Walter would stay, and I guarantee a lot of the senior management would leave too."

Frank declined to comment on the speculation of future action the board and executives may take should the deal fail.

Asked if Hewlett is considering assembling his own slate of directors to wage war with the current board, she said Hewlett "knows what all his options are and will be making decisions in due course."