HP set to ask Walter Hewlett to resign?

Will there be a showdown at the Hewlett-Packard corral Thursday?

As relations between HP directors and dissident board member Walter Hewlett become more contentious over the proposed mega-merger with Compaq Computer, directors may use Thursday's board meeting to call for Hewlett's resignation, said a source familiar with the company.

The meeting follows on the heels of one of the most heated exchanges yet, in which the directors upbraided Hewlett for statements made in his recent proxy filing on the pending merger.

Hewlett voted in favor of the merger as a board member but publicly came out in opposition to it in November, sparking a kind of family feud, with HP on one side and Hewlett, David Woodley Packard, and the David and Lucile Packard Foundation on the other.

With the family's opposition, HP needs to garner the support of roughly two-thirds of its remaining shareholders to gain approval for the deal, valued at $24.1 billion. The deal also requires regulatory approval, as well as an OK from a majority of Compaq shareholders, although the Compaq vote is seen as far less contested.

Thursday's HP board meeting is expected to yield a more definitive date for the special meeting of HP shareholders to vote on the merger, said a source. A Compaq representative said late Wednesday that its shareholder vote is expected in March. Previously the companies have said only that the respective votes were expected during the first half of 2002.

HP-Compaq: A merger for survival? Carl Howe, principal analyst, Forrester Research, and Rob Enderle, analyst, Giga Research

With the merger process progressing and things becoming more cantankerous, the resignation question looms large. "It's very likely the board will ask him to resign at the meeting," said a source. "I don't see how it can't come up."

But Hewlett, son of company co-founder William Hewlett, is likely to hold his ground should the issue arise.

In previous statements, a representative for Hewlett has said Hewlett was elected to his term by shareholders and has no plans to resign. And under securities regulations, elected directors generally cannot be removed unless they resign.

Rebeca Robboy, an HP spokeswoman, declined to comment on the upcoming board meeting or future nominations for the board. A representative for Hewlett also declined to comment on the director's future election plans.

The company's nine directors will hold their regularly scheduled two-day board meeting starting Thursday. If the issue to remove Hewlett comes to a stalemate, a second attempt may occur during the company's next annual shareholders meeting.

At that meeting, the nominating committee--a small group of directors elected by the board--puts forth a slate of company-endorsed board candidates. As is common practice with a number of companies, board members may be shuffled around from one committee to another during their term. Hewlett once served on the nominating committee but is no longer a member.

HP directors serve a one-year term and are then subject to re-election. Candidates who are not on the proxy can receive a write-in nomination--but that deadline passed on Nov. 29, according to Robboy. She noted that the write-in deadline is the same every year and can be set even though a date for the regular annual shareholders meeting has not been scheduled.

At least one HP director is adamantly against placing Hewlett on the proxy for the next regular annual shareholders meeting, said a source.

"The board would still be strong without him," the source said. "Dick Hackborn knows all the details of the company, and others, like Phil Condit (Boeing CEO) and Sam Ginn (former chairman of Vodafone AirTouch), are great operational guys. Walter has no business background."

Hewlett, meanwhile, is interested in running for another term once this one expires, said a source familiar with the director.

The hits keep coming
In his latest salvo against the pending merger, Hewlett sent a letter Wednesday to HP's more than 750,000 shareholders--asking them to vote against the deal. It was his first direct letter to shareholders. In sharp words, Hewlett argues that the deal is an attempt to purchase the past rather than plan for the future.

"While the proposed merger with Compaq would make Hewlett-Packard much bigger, we believe the company would be less focused and more troubled," he writes in the letter, sent on behalf of himself and a Hewlett family trust.

"It is a backward-looking strategy, trying to accomplish what Compaq failed to do by acquiring DEC (Digital Equipment) and Tandem," Hewlett continues. "Instead of trying to purchase the past, Hewlett-Packard should continue its long tradition of inventing and investing for the future."

In the letter, Hewlett makes his familiar arguments against the deal, saying it would dilute the strength of HP's businesses, pose an integration challenge for management, and hurt shareholders.

"It's a rehash of the same faulty financial assumptions and analyses," HP's Robboy said in response to the letter. "It's based on a static view of the industry and the company and, once again, fails to offer any alternative to create customer and shareowner value."

Hewlett, though, said HP should grow on its own and make smaller acquisitions, where necessary.

"We want it clearly understood that we are not advocating a 'status quo' strategy for Hewlett-Packard," Hewlett writes. "We advocate building on Hewlett-Packard's strengths and dealing with its problems."