The odds of Hewlett-Packard Co. completing its $21-billion acquisition of Compaq Computer Corp. fell below 50% on Wednesday, shareholders and analysts said, after another HP co-founder's son said he opposed the deal.
David W. Packard said late Tuesday that he was likely to vote his personal HP shares and the 25 million shares held by the Packard Humanities Institute against the transaction. Earlier Tuesday, the family of HP co-founder William Hewlett, including HP director Walter Hewlett, said it would vote about 106 million shares against buying Compaq.
The two groups represent about 6% of HP's shares outstanding.
The actions turned what had been a straightforward, if unpopular, business combination into a Silicon Valley soap opera, pitting the scions of technology royalty against the most prominent woman chief executive in the country, embattled HP CEO Carly Fiorina. If the merger fails, some analysts expect Fiorina, 47, to be fired.
"Only 30% of the institutions have to vote against the merger to scuttle the deal," wrote U.S. Bancorp Piper Jaffray analyst Ashok Kumar, concluding that the plan faces insurmountable difficulties. "The odds of Ms. Fiorina's ability to survive are extremely low."
Fiorina already has lost credibility on Wall Street and with some of her own employees by missing her own profit forecasts, embarking on a complex internal restructuring and trying to buy consulting firm PricewaterhouseCoopers. Fiorina abandoned that acquisition under pressure from shareholders..
And many investors worry that by acquiring Compaq, HP would be saddled with a money-losing PC company that has been giving up global market share to Dell Computer Corp.
David Packard said in a statement that he was concerned the acquisition would bury HP's profitable imaging business.
"For some time, I have been skeptical about management's confidence that it can aggressively reinvent HP culture overnight," said Packard, an HP director from 1987 to 1999. "While change is necessary and inevitable, it does not follow that every innovation is an improvement."
The boards of HP and Compaq issued statements Wednesday re-affirming their commitment to the merger.
Shareholders in the two companies are reasoning that the deal is likely to fall apart. HP's stock jumped 17% on Tuesday after the Hewlett family's announcement. It slipped 63 cents Wednesday to $19.18. Compaq shares fell a total of 10% in the two days, ending Wednesday down 51 cents at $7.99--or 34% less than HP's stock-swap acquisition price.
Fiorina and Compaq CEO Michael Capellas have said the merger would help the companies compete against IBM Corp., which sells more high-end computers to big businesses and gets more money from high-profit business services.
And they argue that their combined power in retail stores would help offset the cost advantages of Dell and Gateway Inc., which mainly sell PCs directly to businesses and consumers.
In a strange twist, HP's grand plan to take over one of its biggest rivals may depend on one of Silicon Valley's largest and oldest charitable organizations, the David and Lucile Packard Foundation, which is HP's largest shareholder and has a 10% stake.
David Packard is not on the 12-member Packard Foundation board, but his three sisters are. So are his two brothers-in-law, as well as former HP CEO Lew Platt and former HP Chief Operating Officer Dean Morton.
"The merger comes down to one question: Which way does the David and Lucile Packard Foundation vote?" Lehman Bros. analyst Dan Niles said.
Packard Foundation Chief Financial Officer George Vera said the foundation has agreed to hire a consulting firm to recommend to the board which way to vote. An initial report could come at a Dec. 7 meeting, with the firm wrapping up work by the end of the year.
"We're long-term shareholders, and we have to think about what's in the long-term interests of the foundation," Vera said.
He said the board probably would weigh both the prospects for HP's stock and the emotional issues cited by David Packard, who said his father and William Hewlett "never developed a premeditated business strategy that treated HP employees as expendable."
Thousands of HP employees are expected to lose their jobs if the merger goes through.
The importance of the founding families' shares is amplified by the HP board seat held by deal opponent Walter Hewlett, the son of William Hewlett.
"If your two largest shareholders and particularly the founders' families are voting against it because it doesn't enhance the company, [HP's] board has got to pay attention to that," said David Katz, chief investment officer of Matrix Asset Advisors, who opposes the deal.