HP's Fiorina: Merge or Wither

With less than three weeks left to convince hesitant shareholders to back the biggest computer merger in history, Hewlett-Packard Co. Chief Executive Carly Fiorina said Wednesday her company risked withering if it did not buy Compaq Computer Corp..

Fiorina and Chief Financial Officer Bob Wayman told financial analysts at a meeting in New York that Hewlett-Packard could take merger charges of up to $1.4 billion if the $21 billion deal went through, but would still beat Wall Street expectations for fiscal 2003.

But Fiorina, sounding like a politician in a tight race ahead of shareholder votes on the controversial merger next month, focused on a broader theme: that the technology industry is consolidating and success favors bigger companies that can serve customers' every need.

The deal would combine computer and printer maker Hewlett-Packard with Compaq, the No. 2 PC maker, which also makes computer servers, computer storage and offers services. Hewlett-Packard says the merger would allow it to offer customers one-stop shopping.

Dissident Hewlett-Packard board member Walter Hewlett, a son of one of the founders, argues the deal would create a bloated PC business and dilute the value of Hewlett-Packard's printing franchise. He also believes it would be very tough to integrate the two companies.

Fiorina hit back at Walter Hewlett, who leads opposition to the deal, and denied that she had cut a lavish deal for her post-merger pay, saying executives should be paid at market rates.

Walter Hewlett said Tuesday that Hewlett-Packard in early negotiations had considered a two-year package worth $70 million, including salary, bonuses and options, for Fiorina. He said a proposed package for Compaq CEO Michael Capellas totaled $48 million.

"Standing still means loosing ground. Standing still means choosing the path of retreat, not leadership," Fiorina, the driving force behind the merger, told a standing-room only crowd of about 250 analysts, many of whom left the room soon after she finished.

"In a consolidating industry, do we ensure that our enterprise computing business has scale to truly be a platform of choice, or do we allow it to be subscale and slowly wither?" she asked.

Aiming to harden up its financial analysis of the deal after repeated attacks by Walter Hewlett, Hewlett-Packard Chief Financial Officer Bob Wayman forecast the merger would generate charges for restructuring of $450 million to $700 million and an additional $450 million to $700 million for purchase accounting and goodwill costs.

The cash impact of the charges would be $800 million to $1.2 billion, he said.

He also estimated that earnings per share for the 2003 fiscal year for the combined companies at $1.51 a share, up 12 percent from the Wall Street consensus for Hewlett-Packard's stand-alone earnings of $1.35 a share.

The estimate is based on analysts' consensus forecasts for Compaq's calendar year 2003 of 49 cents per share, adjusted to Hewlett-Packard's October fiscal year end. It excludes the impact of restructuring charges and non-cash charges associated with acquisitions.