Merger battle gets dirty in closing stages

ON WALL STREET: One of the most nondescript places of business pilgrimage in the United States is a one-car garage attached to a house in Adison Avenue, a leafy boulevard of Palo Alto in California populated by Stanford University professors.

I drove past a couple of times before spotting the plaque at No 367 which declares that the garage is the "Birthplace of Silicon Valley".

Here two ambitious engineering students, Mr William Hewlett and Mr David Packard, started a tiny electronics company in 1938 which was to become the advance guard of California's high-tech revolution. They tossed a coin to decide which name should appear first in the title.

Hewlett-Packard's initial product was a device called an audio oscillator, which it sold to Walt Disney studios to monitor sound for the cartoon film, Fantasia. Within two years it moved into a rented office next to Tinker Bell's Fix-It Shop on Page Mill Road, and with the outbreak of war, expanded into a laboratory for research on microwave signals and radar-jamming devices.

As HP grew into a major post-war tech company it established a novel way of doing business: giving employees flexible hours, profit-sharing incentives and respect, and donating money back to the community through philanthropy.

HP kept growing in the 1960s, buying Sanborn Company and F&M Scientific Corporation to enter the medical measurement field, and in recent years it has become a global giant in the manufacture of printing devices and computers.

Some 25 years ago, another Stanford graduate embarked on a career in Silicon Valley, working first as a receptionist in a real estate company just across the road from HP headquarters, and later rising to become a senior executive at Lucent Technologies.

In 1999, Ms Carleton (Carly) Fiorina parked her car in the same real estate company's lot and walked across the road to apply - successfully - for the job of CEO at HP.

Carly Fiorina began to shake up the revered company, whose performance had become sluggish. I first saw her in action early last September when she and her counterpart at Compaq, Mr Michael Capellas, both dressed in power suits, took to the stage in a New York auditorium to announce, with lots of high fives, a merger under which HP would acquire the Houston computer-maker for $25 billion (€28.35 billion) in stock.

"This is a decisive move that accelerates our strategy and positions us to win by offering even greater value to our customers and partners," said Ms Fiorina, whose message was that they could marry good product lines and get rid of the bad.

Not so fast, responded the analysts. Tech mergers more often fail than succeed. This could hurt HP's core printing and imaging business, they said. A merger with Compaq, which sold seven million PCs last year, could drag down HP's profit margins because of the vicious price competition in the perilous PC market.

Mr Walter Hewlett, eldest son of the company's co-founder and a Stanford music professor, rallied Hewlett and Packard family members who hold 18 per cent of stock to oppose the merger. One reason was the inevitability of huge layoffs.

Mr David Packard, of the David and Lucile Packard Foundation, joined in with newspaper advertisements reminding shareholders that "Bill and Dave" would never have approved a plan that made HP employees expendable.

THE issue came to a vote yesterday in California among HP's 900,000 shareholders, the climax of a seven-month proxy war which was conducted by both sides like a presidential election, with town-hall-style meetings, full-page advertisements and intensive lobbying of shareholders, even small-time investors.

Like any political fight, the campaign became dirty in the closing days. Carly Fiorina belittled Walter Hewlett, 57, as a "musician and an academic", motivated more by emotion than reason. Mr Hewlett, a dissident member of the HP board who has invested $32 million in the battle, released documents showing that the company in February considered a pay package worth $63.4 million for Ms Fiorina, implying she had a huge personal stake on the outcome.

It has become a cliffhanger, with the future of the most powerful woman executive in America, the oldest Silicon Valley start-up, and computer-maker Compaq at stake.

The result of the HP vote may be known by the time you read this. Compaq will vote in Houston today and is expected to approve the merger - unless it has already been scuppered by the efforts of the descendants of the two geniuses who started Hewlett- Packard in the tiny garage 64 years ago.