January 30, 2002 12:40 PM PST
Capellas: Fewer merger worries
"I honestly feel better now than I did four or six weeks ago," Capellas said Wednesday at a Banc of America Securities investment conference here.
Meeting with several large investors over the past few weeks gave Capellas more hope for the merger's approval, he said. The deal, under fire from many sides since it was announced last year, became particularly hard-pressed after HP director Walter Hewlett and the Packard Foundation publicly announced their opposition.
At least one large investor, Alliance Capital, has endorsed the merger. Capellas last week said he believes another, Putnam Investments, also approves of the deal. Putnam has not publicly stated its position.
Still pending is an opinion from Institutional Shareholder Services, which advises mutual funds on proxy votes. Capellas met with ISS recently, but Wednesday he declined to say what he believes ISS will recommend, or to speculate how many funds will take the advice.
The companies have done a good job of making their case so far, Banc of America Securities analyst Joel Wagonfeld said. Wall Street roundly criticized the deal when it was first announced, but both retail and institutional investors are now thinking about the financial rationale of the merger rather than focusing on the personalities involved, Wagonfeld believes.
"There's been more of a willingness on the part of shareholders to consider both sides," he said. "The amount of time that's elapsed has gone in their (HP and Compaq's) favor."
Compaq and HP are trusting today's investors, which they said are more knowledgeable and sophisticated than shareholders were in the past, to see how the companies' strengths complement each other rather than overlap, Capellas said.
Last year's cost-cutting moves and the company's current product plans ensure Compaq can survive whether the merger succeeds or not, Capellas said, re-emphasizing a point he has been making lately.
"If the strategic value and the economics are in place, then it (the merger) should hold up," Capellas told the conference audience. "I can't explain the (Hewlett and Packard) families' position. In some ways, I can't even understand it."
However, the skepticism does increase the pressure on the companies to produce rapid results after their merger.
"When you have 'mixed opinions,' you have to have early successes," Capellas said. "If that sounds like we feel a little bit of heat--you bet."
Earlier this week, Hewlett-Packard emphasized the services aspect of the merger. However, the companies also have less overlap on the hardware side than many people think, Capellas said Wednesday.
"You really have to drill down a level deeper," he said.
HP's strengths include commercial Unix servers, system management tools, commercial PCs and printing and imaging. Compaq sees its strongest assets as fault-tolerant servers, supercomputing, industry-standard (rather than proprietary) servers, storage-area networks, consumer PCs and handheld devices. Compaq also has a much larger Web sales operation.
The merger hasn't affected business as much as executives expected. Compaq's fourth quarter--a period that was Capellas' biggest worry, he said--was stronger than many analysts anticipated.
"It doesn't look like either company's lost a whole lot of momentum," he said.
On Wednesday Walter Hewlett said he filed a report with the Securities and Exchange Commission that cited Compaq's acquisition of Digital Equipment as a failed merger. He believes the Digital Equipment purchase is the most comparable example for HP-Compaq.
Walter Hewlett pointed to a decline of 80 percent in Compaq's shareholder value since the Digital Equipment acquisition was announced. "In 2000, at the peak of the IT spending cycle, Compaq's earnings were less than half the level predicted at the time of the merger," the report declared.
Capellas defended the Digital Equipment acquisition as a successful one. Although the total purchase price at the time of the acquisition in 1998 was $9.6 billion, Capellas said, the deal actually cost Compaq roughly $6 billion once cash and certain other assets that came with Digital are factored in.
Capellas became CEO of Compaq slightly more than a year after the Digital acquisition was completed. Compaq's share price notwithstanding, the company's "internal" rate of return on Digital has been about 20 percent, Capellas estimated.
"The numbers (on Digital) clearly work," he said. "You draw your own conclusions. Maybe it says the marketing needs to be better."