HP responds to Hewlett proxy fight

Hewlett-Packard's response, revealed in a filing with the Securities and Exchange Commission, came a day after Walter Hewlett filed his formal proxy notice to shareholders of Hewlett-Packard stock--making an official call to vote against the megamerger between HP and Compaq.

Hewlett's proxy awaits final approval by the SEC. Once the proxy has been finalized, Hewlett can send green cards asking shareholders to tender their votes against the merger.

While explaining the reasons for Hewlett's opposition, the proxy also explains why Hewlett voted in favor of the merger as a director but opposes it as a stockholder. The split in his voting interests--which he claims was suggested by HP's outside counsel, Larry Sonsini--came out of the desire to prevent HP from having to pay even more for Compaq.

Sonsini could not be reached for comment. In its filing, HP reiterated that the merger with Compaq is "the best way to provide value to all of our share owners."

"The merger will accelerate our strategic transformation by years by bolstering all of our businesses, including enterprise computing, PCs, IT services and printing and imaging," the company said in the statement.

The company also cited David Packard's motto: "To remain static is to lose ground."

It has long been anticipated that Hewlett, a 14-year board member of HP and son of co-founder William Hewlett, would formally file a proxy notice, since he publicly voiced his opposition to the merger and launched an anti-merger campaign.

Hewlett said in the proxy statement that he believes the merger will dilute the value of HP's stock by, among other things, increasing the company's exposure to the volatile PC market and attenuating management's concentration on HP's successful operations, such as its printing division. The market's reaction to the news of the merger, which sent the shares of both companies sliding, has confirmed his beliefs, Hewlett said.

Hewlett is joined in opposition by other members of the Packard and Hewlett families and by independent foundations created by founders William Hewlett and David Packard. Collectively, the group controls approximately 18 percent of HP's stock.

The proxy sheds considerable light on how HP's board came to vote on the merger. In the filing, Hewlett said he had expressed reservations about the merger since May 2001, when he learned that HP CEO Carly Fiorina was discussing merger possibilities with Compaq.

The issue of the merger finally came to a head in a series of meetings at the end of August and the beginning of September. On Aug. 31, three days before the board was expected to vote on the issue, Hewlett said Sonsini, HP's legal counsel and one of Silicon Valley's most prominent attorneys, told him at an HP board meeting that a merger agreement had been worked out and that it would require a unanimous approval by directors.

Hewlett said that he expressed reservations and that Sonsini talked with him outside the presence of the other board members. The merger, Sonsini allegedly told him, would occur with or without his approval. Without his approval, however, the deal would have to be renegotiated, which might result in a higher price. Sonsini further added that Hewlett could vote for the merger and then vote against it as a stockholder.

"Since the proposed merger was certain to be approved by the board without his vote and because he believed it was in the best interests of HP stockholders to negotiate the best possible price for Compaq if the proposed merger were to be submitted to a stockholder vote, Mr. Hewlett determined to vote for the proposed transaction as a director and give stockholders the opportunity to make their own decision," the document states.

"On Monday, Sept. 3, 2001, during the telephone call in which the proposed merger was approved by the HP board, Mr. Hewlett informed the board that he might not support the proposed merger as a stockholder, and that, if the vote were to occur on that day, he would vote against the proposed merger as a stockholder," the document said.

After the merger announcement, Hewlett continued to examine the sagacity of the transactions. The negative market reaction of the merger, combined with the lift in the company's stock after he voiced his opposition publicly, confirmed to Hewlett that the merger was ill-advised, the document states. Independent directors on the Hewlett and Packard foundations subsequently came out against the transactions.

Hewlett's "concerns were, and still are, focused on his belief that the proposed merger will permanently destroy stockholder value," the filing states. "He does not believe HP should dilute its ownership in the imaging and printing business in order to increase its exposure to the mature and unprofitable PC business.

"He also believes that mergers involving computing companies have consistently destroyed stockholder value and that HP should not expose its stockholders to that risk."

The proxy further emphasizes that the decision by both family foundations to vote against the merger came partly as a result of recommendations from non-family advisers.

The Hewlett Foundation's investment committee contains no family members or HP employees, the proxy stated. It voted against the merger after considering the opinion of Laurance Hoagland, the Hewlett Foundation's chief investment adviser and the former manager of the investment trust of Stanford University.

Hewlett also consulted with the investment firm Friedman Fleischer & Lowe.