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“Even the shooting of your father was business, not personal.” Tom Hagen (Robert Duvall) to Sonny Corleone (James Caan) in The Godfather.
Where was the wise consigliore to offer similar advice to Hewlett-Packard chief executive Carleton Fiorina during her heated battle with dissident director Walter Hewlett and others who opposed the company’s $21 billion acquisition of Compaq Computer?
T he bitter six-month battle between Hewlett-Packard’s management and its founding families for the hearts and minds and votes of 900,000 shareholders culminated on Tuesday with a shareholder vote that appeared to go Fiorina’s way. (She claimed victory, although Hewlett would like to wait for all the ballots to be counted before conceding defeat.)
But it may be a pyrrhic victory for Fiorina and her team, who launched an unprecedented personal assault on the dissenting director that will change forever the image of HP as Silicon Valley’s most humane and progressive large company.
The proxy battle was the most vituperative in many years, dominating the business headlines for six months as the two sides traded barbs. Both sides traveled the country, meeting with large institutional shareholders, and bombarded individual investors with mailings soliciting their support. Both sides created websites to present their cases online.
“A lot was said about this being waged more like a political campaign, with personal attacks and attack ads,” says Donni Case, chief executive of investor relations powerhouse The Financial Relations Board. “But really these tactics have been used frequently over time. What was notable was the cost and visibility of this contest—and the record amount of shareholder money spent on it.”
More than the amount of money involved, however, it was the tone of the campaign—increasingly vituperative as the deadline grew closer—that captured the imagination of the media.
“I have seen this level of vitriol against corporate raiders,” says one veteran of mergers and acquisitions public relations. “But I have never seen a company run this kind of campaign against one of its own directors over an honest disagreement about strategy.”
For some, the vitriol was particularly startling because the company involved was Hewlett-Packard, for many years one of the most admired corporations in America.
“For whatever advantage was gained, the face of HP was changed forever by the vitriol of the remarks made on both sides,” says Michael Weiser, president of Chicago-based public relations and investor relations firm The Weiser Group. “Doubts about the company and management’s ability to carry off the merger will linger for a long time and have a dampening effect on shareholder value. Without wanting to seem naive, wasn’t there a way to do this without scorching so much earth?”
The war of words between Fiorina and Hewlett began as a disagreement over strategy. Fiorina and the HP management team believed buying Compaq would give it the opportunity to integrate its printing and personal computing business, to achieve economies of scale in the troubled PC business, and to squeeze out about $2.5 billion in annual cost savings. Hewlett, on the other hand, felt HP was overpaying for Compaq, that the merger would simply create a bigger PC business at a time when margins on PCs are declining, and that the post merger integration would create unnecessary risk.
But there was more at stake here than the merits and mechanics of the merger. This was a battle over the soul of the corporation—or rather, between those who believe a corporation has a soul and those who believe you can learn everything there is to know about a company from its balance sheet.
Says Jeff Goodell, author of the Silicon Valley memoir Sunnyvale, “For an entire generation of Silicon Valley entrepreneurs, including Steve Jobs, who has often said that HP was the inspiration for the freewheeling corporate culture at Apple, HP represented the dream of a company that was not just fun to work for and treated its employees well, but which was built upon a foundation of loyalty, trust and community service. It was the embodiment of ethical capitalism.”
Fiorina had used the HP heritage shrewdly from the moment of her arrival. As an outsider—she joined HP in the CEO role from Lucent Technology—she seized on the company’s iconography in an attempt to show she understood the importance of its heritage and its culture. In 1999, the company’s ads featured the garage where HP—and some say Silicon Valley itself—was founded. The “Back to the Garage” campaign provided some cover for the new CEO as she slashed thousands of jobs and reorganized the company.
During the proxy fight, Fiorina again reached into the company’s past for potent imagery. Ads urging shareholders to vote in favor of the merger featured pictures of Bill Hewlett and David Packard in their shirtsleeves, and in an attempt to suggest the founders would have supported the merger, quoted Packard: “To remain static is to lose ground.”
Of course, Packard was better known for his musings on the responsibility of a corporation to multiple stakeholders. He famously recalled a meeting with business leaders. “I suggested at the meeting that management people had a responsibility beyond that of making a profit for their stockholders. I said we had a responsibility to our employees to recognize their dignity as human beings, and to assure that they should share in the success that their work made possible. I pointed out, also, that we had a responsibility to our customers, and to the community at large, as well. I was surprised and shocked that not a single person at that meeting agreed with me.”
In light of recent events, it’s hard to imagine Packard’s view would have earned much support from Fiorina, had she been present. In her campaign to save the merger, she may have irreparably damaged the company’s relationship with its own employees—two-thirds of whom were opposed to the deal—as well as large segments of the scientific and technological community in Silicon Valley, and perhaps even some customers.
In September, when HP announced its plan to acquire Compaq, Wall Street was skeptical. Not only would the deal, valued at $25 billion when it was announced, be the largest in computing industry, but it would also increase HP’s stake in the personal computer market, where profits have been increasingly scarce in recent years. HP’s share price dropped 18 percent the day of the announcement.
The two companies launched their campaign to persuade shareholders of the merits of the deal almost immediately, but it was interrupted by the events of September 11, and when Hewlett announced his opposition to the deal early in November, the company appeared surprised and ill-prepared.
After announcing his opposition to the proposed acquisition, Hewlett met with editors and Wall Street investors in New York to explain his position. He made no disparaging remarks about Fiorina, and even indicated his continued support for her as CEO if the deal was rejected. A week later, Fiorina seemed to take the same view. “This isn’t about me,” she told reporters.
For the next couple of months, although the battle grew more intense, the tone remained civil. But in December the David and Lucile Packard Foundation—the largest Hewlett-Packard shareholder, with 10.4 percent of the company’s stock—announced that it would also oppose the Compaq merger, dealing an embarrassing blow to Fiorina and her team, who now found themselves battling the families of both founders.
HP retained the services of mergers and acquisitions PR specialist Citigate Sard Verbinnen and stepped up its media and investor relations efforts. Executives and board members visited with institutional shareholders and pressed the merits of the deal.
But in late January, the tone of the debate took a dramatic shift when the HP forces decided to attack Hewlett personally. In a letter to shareholders, the company sneeringly referred to the leader of the opposition forces as “an academic and a musician.” In fact, Hewlett runs the William & Flora Hewlett Foundation, the 19th largest foundation in the U.S., and has served on the HP board since 1987. (He also has a PhD and plays multiple musical instruments, and is the inventor of a software program for composers.)
“Carly Fiorina launched a marketing campaign to try to discredit the person leading the opposition,” said James Gaither, a venture capitalist and a director of the Hewlett foundation. “This isn’t just Walter personally. This is a whole bunch of people. This is the last thing any of them wanted.”
The attacks on Packard alienated many in Silicon Valley, particularly at Stanford University, which supplies a colossal amount of talent and innovation to high-tech companies. The Hewlett foundation donated $400 million to Stanford in 2001, and Susan Packard Orr, chairwoman of the Packard foundation, is on the Stanford board of trustees.
Hewlett, who had allowed his attorneys and his public relations advisors at Joele Frank, Wilkinson Brimmer Katcher to do most of his talking, started giving on the record interviews. In response to demands from Fiorina and her team that he present an alternative vision of the company’s future, he unveiled what he called a “focus and execute” strategy, one that emphasized the company’s lucrative printer business and profitability rather than size in the PC business.
Fiorina was not impressed, deriding the strategy in front of investors a week later: “It’s not a plan; it’s a press release.”
Then Hewlett, a member of the compensation committee of HP’s board, dropped a bombshell, revealing that the company had considered paying Fiorina and Capellas $115 million in salary, bonuses and stock options—with $63 million earmarked for Fiorina—on completion of the deal, a windfall for the two executives regardless of whether the strategy was a success.
HP responded that the company had deferred any decision on executive compensation until after the merger was approved, a response that didn’t cut much ice with activist shareholders. Sarah Teslik, executive director of the Council of Institutional Investors, said HP appeared to have deferred its decision just so it could claim there was no package in place. “That may be Bill Clinton’s truthfulness,” she said, “but it’s not mine.”
The attacks provoked over foes, even those who had remained on the sidelines for most of the battle. In the last few days of the campaign, David Packard, son of the founder, became more vocal in his opposition, taking out ads against the deal and reprinting a speech by his father about the company’s values. “If you are pondering how to vote on the proposed merger, you might ask yourself whether Bill and Dave could have devised a premeditated business plan that treated H.P. employees as expendable,” the ads suggested.
By the time the battle was over, Hewlett’s supporters claimed HP had spent more than $150 million on the proxy fight—a number HP disputes—and that Fiorina had logged 99,000 miles flying around the country to make her case to institutional investors who control big blocks of stock. Says Joele Frank, who worked with Hewlett, “We had a good sized budget but we were outspent about five to one. The power of the corporate machinery was awesome.”
Opponents of the deal were out in force at the Flint Center in Cupertino where the shareholder meeting was held. They cheered Hewlett “like a rock star” in the words of a CNBC reporter at the scene, and some inside the center booed Fiorina. Others carried signs warning “Merger today… Chapter 11 tomorrow,” or draped themselves in green, the color of the “no” proxy cards.
The presence of these protestors, many of them employees of either HP or Compaq, was telling, because employee shareholders can usually be counted on to support their own management in overwhelming numbers. There were suggestions that the unusually high level of internal dissent would make the human side of post-merger integration even more difficult, but HP appears unconcerned.
“It doesn’t much matter to them what employees think,” says one Silicon Valley public relations professional. “If the merger goes through, 15,000 of them are going to be out of work, and the rest will be grateful they still have a job.”
More troubling for the company is the fact that several large institutional shareholders—the kind of people who normally rubber stamp management strategies—joined the opposition forces.
Says Weiser, “The traction the con side was able to get is a referendum on a larger issue: the growing conviction on the part of investors that the vast majority of large-company mergers do not work and result in earnings disappointments, restatements and, ultimately, large write-offs of goodwill.”
In a statement, Fiorina claimed HP management had won a “decisive majority” of shareholder votes, and sounded a conciliatory note. “Building a bridge begins today,” she told a news conference after the meeting. “Both sides have fought hard for what they believe is the right thing.”
At least two interesting questions remain, and the answers—which should be known within the next few weeks—will tell us a lot about how sincere Fiorina is in her desire to build bridges.
The first is whether Fiorina and Capellas do receive the outrageous post-merger bonusus that became a bone of contention during the proxy fight. As The New York Times suggested in a post-merger editorial, if the management of the new company opts to “abandon any plans of turning the deal’s closing into a financial windfall for top executives at HP and Compaq” it could “reduce the acrimony and encourage investor confidence in the combined entity’s prospects.”
The second is whether there will be a role for Hewlett on the post-merger board of directors. He emerged during the proxy battle as the conscience of the corporation, and clearly represents the views of, at the very least, a significant minority of its shareholders.
“Most recent ‘meltdowns’ of shareholder value have immediately been followed by cries of ‘where was the board,’ ad involved companies with boards and auditors that were not deemed sufficiently independent from management, and thus not providing any effective checks and balances,” says FRB’s Case. “In this case, although H-P tried demonizing Walter Hewlett, he is being given credit for being a very active, involved director willing to stand up to management, state his disagreements, and even put significant money behind his opposition, and take a lot of heat from the company in doing so.”
Whatever happens to Hewlett, Case believes his example may inspire other directors to stand up to management behind the scenes and even publicly state their opposition.
Where was the wise consigliore to offer similar advice to Hewlett-Packard chief executive Carleton Fiorina during her heated battle with dissident director Walter Hewlett and others who opposed the company’s $21 billion acquisition of Compaq Computer?
T he bitter six-month battle between Hewlett-Packard’s management and its founding families for the hearts and minds and votes of 900,000 shareholders culminated on Tuesday with a shareholder vote that appeared to go Fiorina’s way. (She claimed victory, although Hewlett would like to wait for all the ballots to be counted before conceding defeat.)
But it may be a pyrrhic victory for Fiorina and her team, who launched an unprecedented personal assault on the dissenting director that will change forever the image of HP as Silicon Valley’s most humane and progressive large company.
The proxy battle was the most vituperative in many years, dominating the business headlines for six months as the two sides traded barbs. Both sides traveled the country, meeting with large institutional shareholders, and bombarded individual investors with mailings soliciting their support. Both sides created websites to present their cases online.
“A lot was said about this being waged more like a political campaign, with personal attacks and attack ads,” says Donni Case, chief executive of investor relations powerhouse The Financial Relations Board. “But really these tactics have been used frequently over time. What was notable was the cost and visibility of this contest—and the record amount of shareholder money spent on it.”
More than the amount of money involved, however, it was the tone of the campaign—increasingly vituperative as the deadline grew closer—that captured the imagination of the media.
“I have seen this level of vitriol against corporate raiders,” says one veteran of mergers and acquisitions public relations. “But I have never seen a company run this kind of campaign against one of its own directors over an honest disagreement about strategy.”
For some, the vitriol was particularly startling because the company involved was Hewlett-Packard, for many years one of the most admired corporations in America.
“For whatever advantage was gained, the face of HP was changed forever by the vitriol of the remarks made on both sides,” says Michael Weiser, president of Chicago-based public relations and investor relations firm The Weiser Group. “Doubts about the company and management’s ability to carry off the merger will linger for a long time and have a dampening effect on shareholder value. Without wanting to seem naive, wasn’t there a way to do this without scorching so much earth?”
The war of words between Fiorina and Hewlett began as a disagreement over strategy. Fiorina and the HP management team believed buying Compaq would give it the opportunity to integrate its printing and personal computing business, to achieve economies of scale in the troubled PC business, and to squeeze out about $2.5 billion in annual cost savings. Hewlett, on the other hand, felt HP was overpaying for Compaq, that the merger would simply create a bigger PC business at a time when margins on PCs are declining, and that the post merger integration would create unnecessary risk.
But there was more at stake here than the merits and mechanics of the merger. This was a battle over the soul of the corporation—or rather, between those who believe a corporation has a soul and those who believe you can learn everything there is to know about a company from its balance sheet.
Says Jeff Goodell, author of the Silicon Valley memoir Sunnyvale, “For an entire generation of Silicon Valley entrepreneurs, including Steve Jobs, who has often said that HP was the inspiration for the freewheeling corporate culture at Apple, HP represented the dream of a company that was not just fun to work for and treated its employees well, but which was built upon a foundation of loyalty, trust and community service. It was the embodiment of ethical capitalism.”
Fiorina had used the HP heritage shrewdly from the moment of her arrival. As an outsider—she joined HP in the CEO role from Lucent Technology—she seized on the company’s iconography in an attempt to show she understood the importance of its heritage and its culture. In 1999, the company’s ads featured the garage where HP—and some say Silicon Valley itself—was founded. The “Back to the Garage” campaign provided some cover for the new CEO as she slashed thousands of jobs and reorganized the company.
During the proxy fight, Fiorina again reached into the company’s past for potent imagery. Ads urging shareholders to vote in favor of the merger featured pictures of Bill Hewlett and David Packard in their shirtsleeves, and in an attempt to suggest the founders would have supported the merger, quoted Packard: “To remain static is to lose ground.”
Of course, Packard was better known for his musings on the responsibility of a corporation to multiple stakeholders. He famously recalled a meeting with business leaders. “I suggested at the meeting that management people had a responsibility beyond that of making a profit for their stockholders. I said we had a responsibility to our employees to recognize their dignity as human beings, and to assure that they should share in the success that their work made possible. I pointed out, also, that we had a responsibility to our customers, and to the community at large, as well. I was surprised and shocked that not a single person at that meeting agreed with me.”
In light of recent events, it’s hard to imagine Packard’s view would have earned much support from Fiorina, had she been present. In her campaign to save the merger, she may have irreparably damaged the company’s relationship with its own employees—two-thirds of whom were opposed to the deal—as well as large segments of the scientific and technological community in Silicon Valley, and perhaps even some customers.
In September, when HP announced its plan to acquire Compaq, Wall Street was skeptical. Not only would the deal, valued at $25 billion when it was announced, be the largest in computing industry, but it would also increase HP’s stake in the personal computer market, where profits have been increasingly scarce in recent years. HP’s share price dropped 18 percent the day of the announcement.
The two companies launched their campaign to persuade shareholders of the merits of the deal almost immediately, but it was interrupted by the events of September 11, and when Hewlett announced his opposition to the deal early in November, the company appeared surprised and ill-prepared.
After announcing his opposition to the proposed acquisition, Hewlett met with editors and Wall Street investors in New York to explain his position. He made no disparaging remarks about Fiorina, and even indicated his continued support for her as CEO if the deal was rejected. A week later, Fiorina seemed to take the same view. “This isn’t about me,” she told reporters.
For the next couple of months, although the battle grew more intense, the tone remained civil. But in December the David and Lucile Packard Foundation—the largest Hewlett-Packard shareholder, with 10.4 percent of the company’s stock—announced that it would also oppose the Compaq merger, dealing an embarrassing blow to Fiorina and her team, who now found themselves battling the families of both founders.
HP retained the services of mergers and acquisitions PR specialist Citigate Sard Verbinnen and stepped up its media and investor relations efforts. Executives and board members visited with institutional shareholders and pressed the merits of the deal.
But in late January, the tone of the debate took a dramatic shift when the HP forces decided to attack Hewlett personally. In a letter to shareholders, the company sneeringly referred to the leader of the opposition forces as “an academic and a musician.” In fact, Hewlett runs the William & Flora Hewlett Foundation, the 19th largest foundation in the U.S., and has served on the HP board since 1987. (He also has a PhD and plays multiple musical instruments, and is the inventor of a software program for composers.)
“Carly Fiorina launched a marketing campaign to try to discredit the person leading the opposition,” said James Gaither, a venture capitalist and a director of the Hewlett foundation. “This isn’t just Walter personally. This is a whole bunch of people. This is the last thing any of them wanted.”
The attacks on Packard alienated many in Silicon Valley, particularly at Stanford University, which supplies a colossal amount of talent and innovation to high-tech companies. The Hewlett foundation donated $400 million to Stanford in 2001, and Susan Packard Orr, chairwoman of the Packard foundation, is on the Stanford board of trustees.
Hewlett, who had allowed his attorneys and his public relations advisors at Joele Frank, Wilkinson Brimmer Katcher to do most of his talking, started giving on the record interviews. In response to demands from Fiorina and her team that he present an alternative vision of the company’s future, he unveiled what he called a “focus and execute” strategy, one that emphasized the company’s lucrative printer business and profitability rather than size in the PC business.
Fiorina was not impressed, deriding the strategy in front of investors a week later: “It’s not a plan; it’s a press release.”
Then Hewlett, a member of the compensation committee of HP’s board, dropped a bombshell, revealing that the company had considered paying Fiorina and Capellas $115 million in salary, bonuses and stock options—with $63 million earmarked for Fiorina—on completion of the deal, a windfall for the two executives regardless of whether the strategy was a success.
HP responded that the company had deferred any decision on executive compensation until after the merger was approved, a response that didn’t cut much ice with activist shareholders. Sarah Teslik, executive director of the Council of Institutional Investors, said HP appeared to have deferred its decision just so it could claim there was no package in place. “That may be Bill Clinton’s truthfulness,” she said, “but it’s not mine.”
The attacks provoked over foes, even those who had remained on the sidelines for most of the battle. In the last few days of the campaign, David Packard, son of the founder, became more vocal in his opposition, taking out ads against the deal and reprinting a speech by his father about the company’s values. “If you are pondering how to vote on the proposed merger, you might ask yourself whether Bill and Dave could have devised a premeditated business plan that treated H.P. employees as expendable,” the ads suggested.
By the time the battle was over, Hewlett’s supporters claimed HP had spent more than $150 million on the proxy fight—a number HP disputes—and that Fiorina had logged 99,000 miles flying around the country to make her case to institutional investors who control big blocks of stock. Says Joele Frank, who worked with Hewlett, “We had a good sized budget but we were outspent about five to one. The power of the corporate machinery was awesome.”
Opponents of the deal were out in force at the Flint Center in Cupertino where the shareholder meeting was held. They cheered Hewlett “like a rock star” in the words of a CNBC reporter at the scene, and some inside the center booed Fiorina. Others carried signs warning “Merger today… Chapter 11 tomorrow,” or draped themselves in green, the color of the “no” proxy cards.
The presence of these protestors, many of them employees of either HP or Compaq, was telling, because employee shareholders can usually be counted on to support their own management in overwhelming numbers. There were suggestions that the unusually high level of internal dissent would make the human side of post-merger integration even more difficult, but HP appears unconcerned.
“It doesn’t much matter to them what employees think,” says one Silicon Valley public relations professional. “If the merger goes through, 15,000 of them are going to be out of work, and the rest will be grateful they still have a job.”
More troubling for the company is the fact that several large institutional shareholders—the kind of people who normally rubber stamp management strategies—joined the opposition forces.
Says Weiser, “The traction the con side was able to get is a referendum on a larger issue: the growing conviction on the part of investors that the vast majority of large-company mergers do not work and result in earnings disappointments, restatements and, ultimately, large write-offs of goodwill.”
In a statement, Fiorina claimed HP management had won a “decisive majority” of shareholder votes, and sounded a conciliatory note. “Building a bridge begins today,” she told a news conference after the meeting. “Both sides have fought hard for what they believe is the right thing.”
At least two interesting questions remain, and the answers—which should be known within the next few weeks—will tell us a lot about how sincere Fiorina is in her desire to build bridges.
The first is whether Fiorina and Capellas do receive the outrageous post-merger bonusus that became a bone of contention during the proxy fight. As The New York Times suggested in a post-merger editorial, if the management of the new company opts to “abandon any plans of turning the deal’s closing into a financial windfall for top executives at HP and Compaq” it could “reduce the acrimony and encourage investor confidence in the combined entity’s prospects.”
The second is whether there will be a role for Hewlett on the post-merger board of directors. He emerged during the proxy battle as the conscience of the corporation, and clearly represents the views of, at the very least, a significant minority of its shareholders.
“Most recent ‘meltdowns’ of shareholder value have immediately been followed by cries of ‘where was the board,’ ad involved companies with boards and auditors that were not deemed sufficiently independent from management, and thus not providing any effective checks and balances,” says FRB’s Case. “In this case, although H-P tried demonizing Walter Hewlett, he is being given credit for being a very active, involved director willing to stand up to management, state his disagreements, and even put significant money behind his opposition, and take a lot of heat from the company in doing so.”
Whatever happens to Hewlett, Case believes his example may inspire other directors to stand up to management behind the scenes and even publicly state their opposition.
Article tags
Financial Communications-Mergers & Acquisitions
