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Hewlett's "focus and execute" strategy

With a month to go until a shareholder vote, Walter Hewlett tries to make a stronger financial case for rejecting Hewlett-Packard's planned acquisition of Compaq Computer.

With a month to go until a shareholder vote, Walter Hewlett tried to make a stronger financial case Tuesday for rejecting Hewlett-Packard's planned acquisition of Compaq Computer.

In a filing with the Securities and Exchange Commission, Walter Hewlett says his plan, which he calls a "focus and execute" strategy, could be worth $14 to $17 more per share than the company would be worth if it buys Compaq.

Hewlett contends that by not merging and instead focusing on improving the profitability of its PC business and growing its printing business, HP has the potential to double its operating margins by 2003. Hewlett also argues the company would get a higher valuation from Wall Street because of the lower risk associated with that strategy.

"HP's strong positions in its core markets provide the basis for what we believe are compelling alternatives to the proposed Compaq merger," Hewlett said in a statement.

HP responded by calling Hewlett's latest move a hastily prepared response to criticism that he offers no alternative to the Compaq merger.

"HP shareowners deserve a carefully considered, comprehensive plan--not last-minute propositions that change weekly," the company said in a statement.

Hewlett presented Tuesday's efforts not as a detailed plan, but rather as a view of how the company might perform without a merger, and by strengthening its existing business.

"I firmly believe that if stockholders reject HP's proposed merger with Compaq, it is the responsibility of the CEO, working with the board of directors, to develop an alternative strategic plan," Hewlett said in a statement. "What I have been presenting to stockholders is a set of guidelines that offers a framework within which superior stockholder value can be achieved at much lower risk."

HP spokeswoman Rebeca Robboy characterized Hewlett's numbers as "flawed economic theory...There's no such thing as a low-risk, high-return strategy," she said.

In the past, Hewlett has argued that the deal would erode HP's value by at least $4.50 a share because of lost revenue, while HP has maintained the cost savings of the deal will add between $5 and $9 per share in value to HP shares.

HP's shareholders are set to vote on the deal March 19.

Hewlett focuses much of his growth plan on expanding the part of HP's business that makes printers and digital cameras, calling it the "crown jewel" of HP's portfolio. Hewlett also suggests HP should "seriously re-examine" spinning off the imaging and printing business within the next 12 to 18 months.

Part of Hewlett's plan for HP also includes a "potential CEO transition," but Hewlett's financial advisers make the case that the departure of CEO Carly Fiorina might not be bad for HP's stock, pointing out several individual cases where high-tech companies have seen their shares rise after a change in management.

In a letter to shareholders, also released Tuesday, Hewlett declined to predict how the vote would go, saying his lawyers advised against such a move. Nonetheless, he sounded optimistic.

"Both sides can always claim momentum, but in the end it's only votes that count," Hewlett said. "We like where we are and what we've heard from investors throughout this campaign."