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March 7, 2002, Thursday, Late Edition - Final

SECTION: Section C; Page 4; Column 3; Business/Financial Desk

LENGTH: 891 words

HEADLINE: F.T.C. Raises No Objections to Hewlett-Compaq Merger

BYLINE: By CHRIS GAITHER

DATELINE: SAN FRANCISCO, March 6

BODY:
A day after winning support from a prominent shareholder advisory firm, Hewlett-Packard's effort to acquire Compaq Computer received another boost -- unanimous approval from the Federal Trade Commission.

The move, while expected, paved the way for a tightly contested vote of Hewlett-Packard's shareholders on March 19. The commission said it had investigated whether the merger of the companies would damage competition in the markets for personal computers, data-serving computers and microprocessors. After working with regulatory officials in the European Union, which on Jan. 31 dropped an inquiry into the merger, the commission voted 5 to 0 today to close the inquiry without requiring any concessions from the two companies.

"The commission did not find reason to believe that the proposed transaction would impair competition in any relevant market," it said in a statement.

Of particular concern to the commission was the deal's potential effect on the high end of the computer market, where both companies sell 64-bit Unix servers and chips. But after reviewing the proposed merger, Mozelle W. Thompson, a commissioner, said in a statement that "the combination -- instead of reducing competition by eliminating a 64-bit-chip rival -- may enhance the merged firm's capabilities and ensure a long-term competitor in the Unix server microprocessor market."

Other companies in that market include I.B.M. and Sun Microsystems.

With the final regulatory hurdle cleared, Hewlett-Packard and Compaq said their $24 billion deal continued to gain momentum in the face of a bitter proxy fight waged by Walter B. Hewlett, an heir of the company's co-founder, William R. Hewlett.

On Tuesday, Institutional Shareholder Services, a proxy research firm whose reports are received by 23 percent of Hewlett-Packard's investors, released a long-awaited report that recommended that the company's shareholders vote in favor of the merger. To little surprise, the firm today issued a similar endorsement of the merger for Compaq's shareholders, who will vote on the deal March 20.

Critics of the acquisition have called it overpriced, wrought with risks in integrating the companies and far more favorable to Compaq than to Hewlett-Packard.

"Although the merger has occasioned significant debate among H.P. shareholders who raise justifiable concerns about whether pushing further into the PC business and diluting their ownership in imaging and printing is a good idea, there is near-unanimity on the desirability of the deal from Compaq's perspective," Ram Kumar, an assistant director with International Shareholder Services, wrote in the report.

Shares of Hewlett-Packard fell 42 cents, to $20.18 today, while Compaq rose 40 cents, to $10.98.

With the endorsements in and the proxy arguments of combatants laid out, shareholders have two weeks to decide whether the merger would build a computing superpower, as the companies argue, or a sluggish corporation that is heavily exposed to the flagging PC market, as Mr. Hewlett contends.

Though long awaited, the report from Institutional Shareholder Services may not sway investors as much as Hewlett-Packard would like. Barclays Global Investors, which owns 3 percent of Hewlett-Packard's shares, put its votes completely in the hands of the firm to avoid a conflict of interest because its chief executive, Patricia C. Dunn, sits on the Hewlett board.

But in interviews today, several investment managers and analysts said the endorsement had been too weak to sway their vote.

"We're going to kick it around here for a few days," said Jerome L. Dodson, president of the $600 million Parnassus Fund, who is "leaning toward" voting his 170,000 Hewlett-Packard shares against the deal. "But right now I don't see anything in the I.S.S. report that is going to make us more positive on the merger."

Mr. Dodson, based in San Francisco, said the recommendation relied too heavily on "on the one hand, on the other hand" arguments and lacked solid analysis. But he said the endorsement revived Hewlett-Packard's chances of pulling off the deal, which had been severely handicapped when the heirs of the company's co-founders vowed to vote their 18 percent of shares against the deal.

In an effort to sway voters, Mr. Hewlett and executives from Compaq and Hewlett-Packard have traveled the country to meet with top shareholders. State Street Global Advisors, which holds stakes of 2 percent in both Hewlett and Compaq,' has received one visit from Carleton S. Fiorina, the chairwoman and chief executive of Hewlett-Packard, and two visits from Mr. Hewlett.

If the vote came down to "style points," State Street would have a difficult time choosing, said John R. Serhant, chairman of the investment committee of the firm, based in Boston. "Walter is a very thoughtful and intelligent individual who, I think, has a good heart in the matter. Ms. Fiorina is also very impressive and intelligent."

But the final decision will be made on whether the merger will increase the value of the companies. Though he would not disclose how his firm intends to vote, he said the investment committee had "pretty much decided" before the I.S.S. report was released.

"This is just another bit of information that the committee needs to consider," he said.
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GRAPHIC: Chart: "They Get Votes, Lots of Them"
Later this month, shareholders of Hewlett-Packard and Compaq will vote on whether to approve the merger of the two companies. The Hewlett and Packard families are opposed to the deal, but an influential shareholder advisory firm, Institutional Shareholder Services, has backed it.

WHO HOLDS HEWLETT-PACKARD SHARES
Hewlett and Packard family members and foundations: 18%

Held or managed by institutions: 57%

Other investors: 25%

Institutions likely to follow recommendation of Institutional Shareholder Services: 12%

Shares held by institutions may not necessarily indicate voting control of those shares.

David and Lucile Packard Foundation
SHARES HELD (MILLIONS): 201.3
PERCENT: 10.4%

William R. Hewlett Revocable Trust
SHARES HELD (MILLIONS): 73.8
PERCENT: 3.7

Capital Research and Management
SHARES HELD (MILLIONS): 67.0
PERCENT: 3.4

Barclays Global Investors
SHARES HELD (MILLIONS): 60.2
PERCENT: 3.1

Bank of America
SHARES HELD (MILLIONS): 53.4
PERCENT: 2.8

Putnam Investment Management
SHARES HELD (MILLIONS): 49.1
PERCENT: 2.5

State Street
SHARES HELD (MILLIONS): 46.7
PERCENT: 2.4

Alliance Capital Management
SHARES HELD (MILLIONS): 45.4
PERCENT: 2.3

State Farm Mutual Auto Insurance
SHARES HELD (MILLIONS): 41.5
PERCENT: 2.1

Hewlett Foundation
SHARES HELD (MILLIONS): 36.5
PERCENT: 1.9

Vanguard Group
SHARES HELD (MILLIONS): 31.8
PERCENT: 1.6

Wellington Management
SHARES HELD (MILLIONS): 26.7
PERCENT: 1.4

Packard Humanities Institute
SHARES HELD (MILLIONS): 25.8
PERCENT: 1.3

Institutional holdings as of Dec. 31; foundation holdings as of Feb. 28.
(Sources: Bloomberg Financial Markets; the foundations)

LOAD-DATE: March 7, 2002

Document 16 of 26.


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