Skids under Fiorina as deal falters

The Hewlett and Packard families have voted against combining forces with Compaq

She is not cooked quite yet, but few in Wall Street seemed willing to predict yesterday that Carly Fiorina, the hard-driving chief executive of Hewlett-Packard and the first woman ever to head a top-20 American company, will still be in her job come the spring. She has a problem and it is called Compaq.

It was early September – exactly one week before the terror attacks on the World Trade Centre – when Ms Fiorina unveiled her master plan to guarantee the future of Hewlett-Packard. The company, a Silicon Valley institution that was 62 years old and a little creaky, was to buy Compaq Computers. The reaction even then was far from friendly. Investors frowned and sent shares in both companies down.

More worryingly, the various factions of the two founding families of the firm – the Hewletts and the Packards – were less than thrilled. Ms Fiorina was faced with persuading them the merger was the best way to move the computer and printer goliath into the future. Apparently, however, she failed.

On Friday, the David and Lucile Packard Foundation announced it would be voting against the deal when it is put before shareholders. That will probably be towards the end of February. (If it ever happens.) It was a stunning blow for Ms Fiorina and for her counterpart at Compaq, Michael Capellas.

The mathematics are now stacked against them. The foundation accounts for about 10 per cent of Hewlett-Packard's voting stock. But other family shareholders had already vowed to fight the plan, notably Walter Hewlett and David Woodley Packard, the two eldest sons of the founders. The company was created by William Hewlett and David Packard in a garage in 1938 with just $538 (£375).

The two families control about 18 per cent of the stock. If the merger is to be approved, Ms Fiorina, 47, must win the support of about two thirds of the remaining shareholders. About 57 per cent of the company is controlled by institutional investors while private investors hold about 25 per cent. She is expected to embark on a roadshow of vigorous campaigning in the next few days.

"They've just lost the first three games of the World Series," said George Elling, of Deutsche Bank Alex Brown, using a baseball metaphor. "They can still win, but they've got to play incredible ball."

The pyschological impact of what has happened is immense. The families have now turned their backs on Ms Fiorina comprehensively. If the merger is rejected, she will surely have to step down. She almost said as much in an interview published yesterday by The New York Times. Speculating about a no-vote from shareholders, she said it would "say a lot about the board and the management's credibility".

"If the deal doesn't get done, she's done," said John Buckingham, co-manager of the Al Frank Fund, which has small stakes in both HP and Compaq.

Ms Fiorina, who studied medieval history and philosophy at Stanford University, was lured from Lucent Technologies by Hewlett-Packard in 1999. She was advertised as a dynamo who could revive a company beginning to look like an also-ran in almost all its markets.

The appointment was controversial, however. She was, after all, the first outsider ever hired to run Hewlett-Packard. And she was well rewarded, with a stock package worth – at the time, at least – about $85m. She drew attention thereafter by expanding the firm's fleet of corporate jets. She has been criticised for her own penchant for travelling non-commercial.

"I knew that coming in as an outsider and moving a 60-year-old company with a grand heritage, and all the crosscurrents that implies, was not going to be easy," Ms Fiorina told The New York Times. And, in a barely disguised swipe at the families, she said: "The company has never been about looking in the rear-view mirror, though some people are more comfortable doing it."

Her case is that by joining with Compaq, Hewlett-Packard will again attain the scale to compete with IBM and Dell. It would make the company the largest maker of personal computers in the world. The combined group would be better placed, she argues, to provide network servers and services to large businesses.

Critics charge that increasing exposure in the profit-deprived PC market is the last thing Hewlett-Packard needs. They wonder about diluting the firm's high-earning printer division and warn mega-mergers in the computer sector in the past have produced more problems than dividends.

Both companies responded to Friday's news by vowing to press on. Some on Wall Street are beginning to mutter that Ms Fiorina and Mr Capellas are only doing so, however, to protect their own jobs. But their fates may already by sealed. It is now "highly unlikely" the merger can come off, predicted Joel Wagonfeld, an analyst with Banc of America Securities. In a note to clients yesterday, he said: "We think both companies should now focus on mending customer relationships rather than risking further damage by fighting this uphill battle."

Ms Fiorina and Mr Capellas are expected to pay an early call on Institutional Shareholder Services, an influential stockholder advisory company in Maryland that sells its analysis to some 950 institutions, many of which will be voting on the merger next year. Rebeca Robboy, a spokeswoman for Hewlett-Packard, agreed that was likely.

But on Wall Street yesterday, the expectation clearly was that the merger was coming undone. Investors dumped Compaq shares, sending them down more then 12 per cent in early trading. Shares in Hewlett-Packard did somewhat better, slipping by 2 per cent.

"I guess Carly will be looking for a new job," said US Bancorp Piper Jaffray analyst Ashok Kumar. "I don't see a scenario how she stays on .... This is basically her last straw to revive the company. This is going to be her epitaph at HP."