HP faces new kind of struggle

After proxy fight, merger must be made to work

May 04, 2002|By BLOOMBERG NEWS

PALO ALTO, Calif. - Hewlett-Packard Co. Chairwoman and Chief Executive Officer Carelton S. "Carly" Fiorina will have little time to celebrate now that the company has completed the $18.9 billion purchase of Compaq Computer Corp. after an eight-month struggle.

The 47-year-old CEO lobbied skeptical investors, fought heirs of her company's founders and convinced a judge that she hadn't misled shareholders in her push to close the deal. Investors say all of that might look easy compared with what's next: stitching together the world's second- and third-largest computer makers.

Fiorina must meld two sales forces with different styles, jump-start sales to meet goals and fend off rivals, and eliminate 15,000 jobs while working to heal worker morale after the battle. Combined operations will start Tuesday, and investors said it might be 18 months to two years before they can judge the outcome.

"It's been a very tough fight, but now you have to worry about running a company," said Tony Hipple, whose First American Funds owns the stock and manages $120 billion. "The next big challenge is to integrate the companies."

Shares of Palo Alto, Calif.-based Hewlett-Packard rose 35 cents to $17.44 yesterday. They have dropped 25 percent since the Compaq purchase was announced Sept. 3. Compaq rose 24 cents to $11.

Fiorina and other executives have said for weeks that they are ready, after 1,200 people mapped out the details, including linking e-mail systems and figuring out how to handle employee benefits. Investors credit her for pushing the transaction through, yet some worry that she won't be able to meet her goals.

"She did a hell of a job getting the deal done," said Bill Schaff, manager of the $70 million Berger Information Technology Fund, which holds Compaq shares. "Now she's got one hellacious job getting the organization combined."

Fiorina declined to comment.

Fiorina will need to keep workers motivated and informed about decisions to meet forecasts for growth, investors said. Officials say that could be the toughest part, after former director Walter B. Hewlett complained about Fiorina and raised concerns that more people would be fired.

"The problems aren't so much with Wall Street and customers; it's with employees," said Thomas Perkins, a Compaq director who is joining the combined board. "Thanks to Walter Hewlett, we've got a fairly serious morale-building effort in front of us."

Surveys commissioned by opponents of the deal found that workers at some locations disliked the Compaq purchase by a 2-to-1 margin. Some employees had praised Hewlett, who was removed from the board last month after he sued to try to block the buyout, as a hero. At the March 19 shareholder vote, attendees greeted Hewlett with a cheer; Fiorina was booed.

Fiorina testified last week in a Delaware courtroom that internal reports showed the company might miss its projections by 25 percent. She said workers were trying to "sandbag" the numbers, lowering targets so that they could be met more easily, and that because she saw a bigger picture, she had better information.

"She's going to have a huge credibility gap with the rank and file," Berger's Schaff said.

Fiorina pursued Compaq to help shore up sales of server computers and services and to create a bigger rival to International Business Machines Corp. The combined company will be the world's biggest maker of servers using Microsoft Corp.'s Windows software, and it will be the No. 3 computer-services provider.

Hewlett objected to the purchase, partly because it will increase personal-computer sales to 33 percent of sales from 21 percent. PC shipments dropped last year for the first time in 15 years, and the market is one of technology's most cutthroat in terms of competitive prices.

Fiorina will have to win back sales of Windows servers from Dell Computer Corp. Dell had 17 percent of that market in 2001, up from 14 percent in 2000, according to Dataquest Inc. Compaq, the leader, fell to 26 percent from 31 percent.

To trim costs, Fiorina must outsource more of Compaq's production and boost sales of computers sold directly to customers.

"The big challenge is, will the computer business be as bad as the market has thought?" said L. Roy Papp, whose L. Roy Papp & Associates manages $1 billion and owns the stock.

Fiorina will be responsible for strategy, and Compaq Chief Executive Officer Michael Capellas will handle daily operations.

If the companies can cut more than the $2.5 billion in costs they've promised, Fiorina might have Hewlett to thank for it. By focusing his criticism on how tough it would be to combine the companies, he forced Fiorina to create the detailed plans that will pay off now, analysts said.

"It's dissenters who keep CEOs at the top of their games," said John Jacobs, whose Jacobs & Co. manages $150 million and sold its Hewlett-Packard stake last year.

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