Shareholder denounces HP-Compaq union

A major investor in both Compaq Computer and Hewlett-Packard is urging the companies to scrap their merger because it believes the chances of the two pulling off a successful union are slim.

Matrix Asset Advisors, which manages the top-rated Matrix Advisors Value Fund, sent a letter last week to the boards of directors of both Compaq and HP advising them to abort their proposed merger, valued originally at $25 billion but now standing at $19.7 billion.

David Katz, chief investment officer at Matrix, said his company is usually a silent investor--"99 percent of the time"--but added that the Compaq-HP merger "pushes the envelope for us."

Katz's biggest beef is that the two companies have a better chance of success remaining independent than as a combined force. Many critics of the deal contend that most major technology mergers don't work and that combining Compaq and HP is a recipe for disaster.

"We like both companies, but prefer they go it alone," said Katz, who added that the merger "is a tough sell."

"We ask our contacts at HP whether they can identify any successful (large) tech merger, and they can't," Katz said.

Executives from Compaq and HP are steadfast about the deal, with HP CEO Carly Fiorina and Compaq CEO Michael Capellas regularly stumping for the combination.

According to filings, there's a $675 million breakup fee for the merger and no collar on the deal, meaning that the respective stocks--and value of the deal--will move in tandem up or down.

It's unclear whether Matrix's letter will result in a groundswell for the Compaq-HP deal to be abandoned. Matrix owns 531,675 shares of HP and 826,846 shares of Compaq.

Although Matrix is a large shareholder, its holdings are considerably smaller than those of other institutions, such as Barclays Bank, Bank of America, Capital Research & Management, Fidelity and Putnam.

Katz said Compaq's board of directors has historically been responsive to shareholders, adding that the board "didn't sell Compaq thinking the stock would fall to $8." He rates HP's board a little less responsive.

HP and Compaq announced a stock-swap deal worth $25 billion. Because of fluctuations in the stock, the value of the deal may change. This is the approximate value (20-minute delay):   $24,149,073,900

Matrix's effort to derail the deal comes as most Wall Street analysts have offered their grudging support for the merger. The consensus view on Wall Street is that no one loves the deal, but it looks like it will happen anyway.

"We believe the merger between HP and Compaq will be completed despite the market's negative reaction," said Joel Wagonfeld, an analyst at Banc of America Securities.

Wagonfeld, like most analysts--and like Katz--said the deal could work in the long run, but quickly added that there are huge integration problems in a tough tech market.

"We see this merger as the best long-term option for each company, though both arguably face a limited set of alternatives," Wagonfeld said.

Robert Cihra, an analyst at ABN AMRO, said the deal is likely to go through since executives from both sides support the merger, but added that it's too early to predict a proxy fight on the horizon.

"There's a good number of shareholders that oppose the deal and a good number that support it," Cihra said. "You'll need more than a couple investors to kill it, and the vote is still awhile away.

"If I had to guess I'd say it's likely to happen," he said.