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Hewlett to directors: Give up on HP-Compaq

Walter Hewlett writes the boards of HP and Compaq, telling them that if the merger is brought to a vote, there is a "high probability" that it will not pass.

Walter Hewlett continued his assault on the rationale behind the Hewlett-Packard merger with Compaq Computer, saying in a letter to the boards of both companies that the "unhappiness" about the transaction goes far beyond what is publicly stated.

Hewlett's letter, which was disclosed Thursday in a filing with the Securities and Exchange Commission, urges the boards of both companies to agree to a "speedy, mutual unwinding" of the deal.

"The handwriting is on the wall, and it is clear," Hewlett wrote in the letter, which was dated Wednesday. "If the merger is brought forward for a vote, there is a very high probability that it will be defeated."

"If we simply continue to push forward to a shareholder vote, there will be serious and increasing adverse consequences," said Hewlett, who has been regularly filing documents arguing against the merger.

In a statement, HP dismissed Hewlett's letter as old news. "Mr. Hewlett offers nothing here but his desire to promote additional concern about possible lost value," the company said.

"The truth is that HP's stock has recovered nearly all of the ground it lost since the merger was announced," HP added. "The truth is that the actions of Mr. Hewlett are the reason that uncertainty and concern are more heightened than they should have been. It is the responsibility of the HP board and management to protect and secure our company's future, and the best way to do that is to build healthy, sustainable businesses, which the merger will allow us to do."

Representatives of Walter Hewlett countered that although HP's stock has recovered ground it lost since the Sept. 3 merger announcement, some of the biggest gains have come on days when there was news suggesting the deal was less likely to go through.

Disclosure of Hewlett's letter comes a day after Webb McKinney, the HP executive charged with integrating the two tech giants, said that HP still believes the deal will work but noted that most of its employees are still focused on doing business as an independent company.

McKinney reiterated his belief that HP can win shareholder support for the deal, despite opposition from Hewlett, David W. Packard, the David and Lucile Packard Foundation, and other family heirs. Collectively, all the heirs hold 18 percent of HP shares.

McKinney's sentiments were echoed by Compaq CEO Michael Capellas in a memo to employees earlier in the week. Both companies are walking a fine line between operating as independent companies while stumping for a merger that has been so hard to sell to shareholders.

see special coverage: Big iron: HP to buy Compaq In his letter, Hewlett said trying to sell the merger to shareholders is a waste of time. HP executives expect a vote in February on the deal, if it gets that far.

"There is enormous unhappiness about this transaction," Hewlett said. "This unhappiness goes far beyond those shareholders and analysts that have spoken out publicly."

In the end, Hewlett said the best bet for both companies is to scrap the merger.

"Each company will misdirect time and energy, waste money, suffer further degradation of employee morale, continue to confuse customers, and delay refocusing on the steps necessary to maintain and enhance itself as an independent company," he said. "Value is being lost here by both companies with each day that passes."

Late Thursday, Compaq's board responded to Hewlett.

"We are disappointed that both the Hewlett Foundation and the Packard Foundation have decided to oppose the transaction," the Compaq board said in a statement. "We continue to believe that the combination of HP and Compaq will provide better market coverage, significant synergies, and higher profits than either company would achieve on its own."

Compaq's board members said they "believe that this merger is well worth the effort and that our employees, shareholders and customers will be better served in the long term."

As a result, the board said it will "continue to vigorously encourage shareholders to vote in favor of the transaction."