Walter Hewlett recasts proxy information

The latest filing comes as the fight between the company's directors and Hewlett has turned increasingly caustic, and industry watchers wonder whether the ill will among the directors can ever be repaired--no matter what happens with the merger.

Hewlett, an HP director and son of co-founder William Hewlett, stated in his latest regulatory filing that he "believed" if he voted against the proposed merger, HP would have to pay a higher price to acquire Compaq.

That statement recasts his earlier preliminary proxy filing, in which he alleged that HP outside counsel Larry Sonsini had advised him that the price of the merger could increase if Hewlett voted against the deal as a director. Hewlett doesn't mention any such advice in his latest filing.

"HP is gratified that Walter is retreating from some of his earlier misstatements, but we continue to be disappointed with the inaccuracies he's giving to the market," said an HP representative, citing Hewlett's claim that he informed the board on the day of the vote that he would vote against the merger if the vote took place that day.

Sources familiar with HP's board said Hewlett, on the day of the vote, indicated he was considering voting his shares against the merger, but did not indicate he had made a definitive decision.

Hewlett, in both filings, indicated that the merger agreement required a unanimous vote by HP directors and he was concerned any redrafting of the agreement would drive up the deal's price. He stated in the filings that he voted in favor of the deal as a way to keep the price as low as possible for HP investors, but planned to vote against it as a shareholder because of his reservations regarding the deal.

Many observers had previously questioned why Hewlett would vote one way as a director but another as a shareholder.

Although HP directors have previously stated that no such requirement was included in the merger, sources familiar with the agreement said the merger draft, prior to HP's vote on the deal, had wording that characterized the directors' vote as needing to be unanimous.

As the merger proposal moves forward, proxy consultants note, it will likely get nastier. But that may have little effect on large investors.

"They tend to get snippier as they go on, but I think most shareholders are above it," said Patrick McGurn, director of corporate programs for proxy service Proxy Monitor. "They tend to look at the merits of the deal, rather than the sideshow."

Proxy Monitor is also affiliated with Institutional Shareholder Services, which advises portfolio managers on how to vote their proxies and on other corporate governance issues. ISS is expected to play a crucial role in the merger vote, given that a number of money managers will vote their shares in accordance with ISS's recommendation. ISS, which will hold meetings with proponents and opponents of the HP-Compaq deal, has stated it plans to announce its stance on the merger, several weeks prior to the shareholder vote.

Scott Klinger, co-director of Responsible Wealth, a nonprofit organization that also reviews corporate governance issues, agrees that most investors will consider a deal's merits, rather than any misrepresentations of a conversation with a company attorney.

Still, according to McGurn, the same may not hold true for mom-and-pop shareholders. "This (credibility issue) would probably have the greatest impact on employees and small investors," he said.

And, rising emotions aside, that's more than enough to keep the sides jostling with each other. Both parties are fighting for every vote they can swing in this hotly contested battle, which could conceivably be decided by a relatively small margin.

Meanwhile, Fiorina tried to brace employees for the battle ahead in a New Year's memo.

"In the days ahead," Fiorina said, "please remember that we did not choose to be drawn into a highly visible proxy contest, nor were we advised ahead of time that a contest would occur."

A representative for Walter Hewlett, meanwhile, declined to address the credibility issue, but noted that the deal is ultimately about the economics of the transaction.

"We believe the transaction destroys shareholder value and the market has borne that out," the representative said.

Hewlett, in the past, has said he opposes the deal because it will dilute the profitability that is achieved from HP's high-margin printer and imaging business and saddle the company with more lower-margin PC business.

HP, meanwhile, has previously argued that the deal will give it a greater presence in the enterprise computing and consulting business, creating a one-stop business for corporate customers.

News.com's Ian Fried contributed to this report.