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A Very Public 'Family' Feud

April 01, 2002

Hewlett-Packard Co. Chief Executive Carly Fiorina has thrown more than 100 million HP dollars into her dogged pursuit of Compaq Computer Corp., boldly declaring victory on the strength of early returns from a stockholder vote. Challenger Walter Hewlett is funding a fierce counterattack, including a lawsuit alleging that Fiorina illegally steered business to a key shareholder in return for swing votes needed to complete the controversial deal.

This is not your typical friendly merger. Proxy fights rarely pit a powerful corporate executive against a dissident director with a famous name and deep pockets. But rancor generated by the slash-and-burn battle will benefit shareholders by subjecting the $19-billion deal to an unusual degree of scrutiny.

HP and Compaq are being forced to hone their merger plans. Teams have spent 500,000 man-hours on transition planning, a level of thought that's crucial because corporate mergers and acquisitions suffer from a mediocre-at-best track record. Management experts agree that between 35% and 85% of corporate deals fail to deliver the goods.

The final vote tally isn't expected for several weeks. By then, HP, Compaq and dissident HP director Hewlett will together have poured more than $200 million into a campaign with enough back-room lobbying and hard-fisted politicking to make the cast of "The West Wing" proud. There's even a possibility of a sequel--the courts could order a new election.

The very public battle contrasts with the typical "let's make a deal" doings in which shareholders and directors rubber-stamp friendly agreements concocted in closed boardrooms. This merger deserves scrutiny because it would create California's second-largest headquarters company, with $82 billion in annual sales, 145,000 employees and a big chunk of the market for personal computers, large business computers and printers.

Why is Fiorina staking her career on this merger? And why is Hewlett fighting so fiercely to derail it? Fiorina is adamant that HP needs Compaq to reach the scale needed to remain a force across a broader technological spectrum. Hewlett counters that bigger isn't necessarily better and points out sliding profits that have dogged Compaq since 1999, when the Houston-based company spent $9 billion to acquire troubled Digital Equipment Corp.

The technology world is littered with the remains of mainframe computer (DEC and Univac) and PC (Commodore and Kaypro) brands that failed to keep pace. The battle at HP is really over the meaning of "keeping pace" today.

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