HP merger is likely to to be bad for everybody

March 24, 2002|By Jay Hancock

CARLY GOT the votes. Walter got the cheers.

Hewlett-Packard heir Walter B. Hewlett, who apparently failed last week to torpedo the company's merger with Compaq, overcame his expensive gray suit to wax wiry and nerdy at the shareholders meeting.

He hasn't written any printer-driver software lately, but no matter. A Fred MacMurray haircut, his dad's DNA and glasses that would have been safety-compliant in an HP machine shop made Hewlett the proxy geek and patriarch.

His brief thanks to people who voted against the Compaq deal prompted a standing ovation from employees and shareholders. Carleton S. Fiorina, Hewlett-Packard's confident, blue-suited boss, got scattered boos and the kind of applause that accompanies a tap-in bogie on the fourth at nearby Pebble Beach.

"I learned how much I love this company and how much I'm willing to fight for what I believe in," Fiorina said.

What she believes is that the company she loves is not lovable enough, that it is too small and too obsessed with the past to thrive alone. She wants paternalistic, technology-driven Hewlett-Packard to marry floundering Compaq, seller of personal computers, corporate servers and business services, to gain the titanic scale so many executives believe is necessary in the modern economy.

Walter Hewlett, who holds advanced degrees in engineering and music and sits on Hewlett-Packard's board, opposed the merger for financial reasons. He worried about plunging more deeply into a business - personal computers - whose profit margins and brand strengths increasingly resemble those of the soybean trade.

But the contest became a plebiscite on the style and substance of modern corporate governance. The brash, bigger-is-better marketing and financial folks took on the tech-driven, "we're family" guys packing HP-49G calculators, the modern slide rule.

Wall Street met Palo Alto's University Avenue. The cost-cutting job slashers met the proud inheritors of a corporate culture that was one of the first to grant stock options to low-level workers, presented silver bowls to marrying employees and sent the rank and file on vacations to a company-owned chalet in Germany.

Conventional business wisdom met "the HP Way," which has a lot in common with the old baseball Oriole Way, only with pocket protectors instead of athletic cups.

It was no random irony that Fiorina hatched the plan to acquire Compaq only months after the death of Bill Hewlett, Walter Hewlett's father and co-founder of the company. To be successful, the Compaq-Hewlett-Packard match will require the elimination of at least $2.5 billion in costs and 15,000 jobs from the two companies.

Bill Hewlett established one of the first worker health-insurance plans and imposed across-the-board pay cuts in the 1970s to avoid layoffs. Along with co-founder David Packard, he listed "customers," "our people" and "citizenship" among the HP Way corporate priorities, along with "profit" and "growth."

Packard, who died in 1996, recalled arguing with business people who held that corporate duty extended only to obeying the law and enriching shareholders.

"I said, `I think you're absolutely wrong,'" Packard said. "`Management has a responsibility to its employees. It has a responsibility to its customers. It has a responsibility to the community at large.' "

These were not guys who were going to countenance the plans of "Chainsaw Carly," as she has been called. The Hewlett-Packard-Compaq merger is being done over their dead bodies.

Walter Hewlett, joined in opposing the deal by Packard heir David Packard and foundations endowed by their fathers, put up a good but apparently losing tussle. Although the founding families controlled 18 percent of the stock, Fiorina said last week that preliminary tallies showed shareholders narrowly approving the combination, although the official count will take longer.

Fiorina is betting that the computer hardware industry has emerged from its quicksilver, fast-growth stage and that high profits will now be found in services such as data management. She sees market share and cost control as more important than patents, genius and worker loyalty.

Even if she's right, the odds are against merger success.

Blending Hewlett-Packard's $45 billion business of printers, high-end servers, scientific instruments and technical services with Compaq's $34 billion operation will be a stressful nightmare, soaking up management attention like a blotter and smothering whatever innovation and spark remains.

Sometimes mergers and resulting layoffs make sense. They're one way the economy increases productivity, which boosts living standards for everybody. But the Hewlett-Packard-Compaq deal looks less like a brilliant strategic coup and more like a scheme by managers who can't think of anything better to do and who are going to earn millions in merger-related bonuses anyway, so who cares?

This deal has been cast as a choice between what's good for shareholders vs. what's good for employees. But it's likely to be bad for everybody.

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