Find Mediators Near You:

Analysis of The Hewlett Packard Proxy Battle


On September 4, 2001, history was made when two of the largest computer companies in the world, Compaq and Hewlett Packard, announced that they were seeking to merge to become the world’s largest computer company, equaled in assets only by IBM. /1 The new company expected to be able to generate an annual revenue of $2.5 billion within one year of the proposed merger. The companies expect to create shareholder value through cost structure improvements and access to new growth opportunities. The merger would occur with HP buying 36% of Compaq shares at a cost of $25 billion. The new company will have assets of $56.4 billion and will have operations in more than 160 countries and over 145,000 employees. /2

The new company is to be lead by Chairperson/CEO, Carlton Forina, Chairperson of HP, and President, Michael Capellas, Chairman of Compaq. The company will be structured in four operating units centered around Imaging & Printing, Computing Systems, IT Software and Storage, and Consulting Services. /3 The companies began the S-4 merger filing process with the SEC. The new company will be headquartered in Palo Alto, but intends to keep a large office in Houston, the former headquarters of Compaq. /4

Both companies are very similar in that their product line and their sales support of IT services and computers with Intel processors. HP outsources most of its manufacturing and Compaq does almost 100% of its own manufacturing. HP controls a large segment of the printer market. /5 These similarities make it natural for the companies to merge, however, it will not be an easy task. The new company will need to be focused on retaining and motivating key employees, developing new products in a timely manner, managing asset and inventory levels, retaining the flow of products into third-party distribution channels, keeping expense levels at a modest rate while increasing revenues, and smoothly assimilating the integration and restructuring with the merger and associated acquisitions. /6

Within two months of the announcement of the merger, Walter Hewlett, a member of the founding family of Hewlett Packard and a member of the board of directors, and the Packard Foundation, announced a decision that they would not support the proposed merger. Hewlett Packard and Compaq met the announcement with disappointment but stated that their responsibility to their shareholders, customers and employees required that they focus on the future and they believed that the merger would deliver growth and higher shareholder earnings. /7 The rest of the HP board of directors supported the merger as of November 7, 2001. /8 The Compaq board of directors wrote a letter to Walter Hewlett stating that they believed that the shareholders of both companies would recognize the value of the merger and give their approval. /9

In an interview with Businessweek, Carly Fiorina stated that she believed that the interests of the Packard Foundation were focused on wealth preservation, but that she was focused on value creation and industry leadership, and that these two goals were divergent. /10 Fiorina stated that HP is very customer-focused and that in 2001, HP filed 3000 patents, twice the number filed in 2000. HP intellectual property is increasing at a rapid rate and the company remained profitable through what has been called one of the most dramatic tech downturns in 40 years. /11 Fiorina stated that she felt that the Packard Foundation reached a difficult decision. However, she felt that Walter Hewlett’s personal behavior was a surprise and an insult to the board. She stated that “there is a big difference between an individual managing his own personal assets and the assets of the foundation and a board member going out and actively soliciting against a board’s decision.” /12 She further stated that it was unprecedented for a deal of this type to go before a board and be voted down–that was unprecedented. /13

On December 20, 2001, The Canadian Competition Bureau was the first to give its go-ahead the proposed merger and said that it found no issues of competitive concern. This removed one of the major regulatory hurdles required to become a market-leading company. /14 On January 31, 2002, The European Commission gave formal clearance for the merger following a lengthy review. The Commission confirmed that the transaction does not raise competition concerns in Europe. No remedies were required in order to secure clearance. /15

On February 11, 2002, HP issued a statement to its shareholders, including proxy information and asking for a vote in favor of the merger. HP stated its reasons for wanting to see the merger completed: HP will be an industry leader in UNIX, Windows and Linux servers; HP will immediately become the industry leader in storage-area networks; HP will lead the market in super-fast and fault-tolerant computing systems (used in the Department of Defense and the world’s largest stock exchanges); the new HP will go after a significant share of the PC market; HP will keep the profitability of its printing business, but will diversify from its strengths into other areas (like digital publishing and digital imaging); the new HP will double the size of its sales force to 15,000 and increase its R& L budget to over $4 billion a year; HP expects to increase its profitability to $1.5 billion per quarter, net of capital expenditures. /16 HP explained the merger to its shareholders as a chance “to embrace the future, rather than attempting in vain to perserve the status quo”. The information statement told shareholders that its board of directors spent two and a half years reviewing options and deciding upon the best direction for HP’s future. /17

The information statement then went on to say, “We do not understand why Walter Hewlett opposes this carefully considered merger. He has no plan to address the challenges and opportunities that HP faces. He presents no alternative. He is just saying no. As Mr. Hewlett tries to convince others to say no, his platform mischaracterizes the facts and the process by which HP’s board came to this decision.” /18 The statement went on to say that “Mr. Hewlett does not understand the linkages between our businesses and the importance of profitability, growth and market leadership in our industry. For example, among his latest assertions is the suggestion that we exit the PC business and shut down PC manufacturing plants. The fact is that we have already outsourced our PC manufacturing. This suggestion underscores the absence of a real plan illustrates his disregard for the strategic, financial and human consequences of such a decision.” /19 “In this rapidly changing IT market, we cannot afford to lose this opportunity nor do we have the luxury of time to start over.” /20

At the same time, Businessweek issued an article stating that Hewlett came close to resigning from the board over the proposed merger and that he “wrestled with his decision while on vacation at his home in the Sierra Nevadas, before deciding how to cast his vote”. With the Hewlett family stock down $600 million, Hewlett declared his opposition to the $24 billion stock purchase of Compaq. The Chairman of Compaq said that if “the merger goes through, [he] doesn’t want Hewlett to remain on the board of directors. This thing has gotten a little ugly. The battle lines are drawn.” /21 Hewlett accused HP’s management of railroading him into voting for the deal and he filed a letter with the SEC over the matter. HP, in return, portrayed Hewlett as a “musician and an academic” in a letter to company shareholders. /22

On February 22, 2002, the HP board of directors sent a stinging letter of criticism against Hewlett to its shareholders. “One thing is entirely clear: this is a man who has no plan for the future of your company or your investments in HP shares…the Wall Street Journal has called Mr. Hewlett ‘a man without a plan’: Your investment and your money are real–Walter Hewlett’s plan is not.” The letter details a string of statements from Hewlett made to the Wall Street Journal over a two week period, where he declares that he has a plan and then withdraws his comment on two occasions. /23 HP then attacks Hewlett’s ‘plan’ to increase stock value from $14 to $17 a share, as a ‘manipulation of earnings projections and invention of stock multiples.’ The letter to shareholders states, “He applies invented earnings to an arbitrarily inflated price earnings multiple–inexplicably 21 percent higher than what he calls ‘current P/E’. This accounts for another $4 to $5 per share of his so-called value. In short, Walter Hewlett wants shareowners to believe he can virtually double HP’s stock price in 18 months through a status quo approach with no costs savings. We don’t understand how Hewlett could make such baseless claims. We can only assume that his financial analysis is the work of his ‘independent’ financial advisors who stand to gain $12 million if the merger is defeated.” /24

Hewlett shot back by trying to recruit a replacement for HP Chairperson, Carly Fiorina. On March 2, 2002, HP characterized this action as “an outrage and a blatant disregard of a director’s responsibilities”: His unilateral action, without conferring with his fellow board members to recruit for [the CEO] position is a blemish on the character and quality of HP;His action lacks integrity and reflects desperation. This action is conduct unbecoming a member of the board” /25

Shortly thereafter, Institutional Shareholders Services, Inc. (ISS), released a recommendation on March 5, 2002, that the shareholders of HP vote for the merger. This was a large factor, by a truly independent expert, of the sound basis for the merger. /26 On March 6, 2002, ISS issued a similar statement to the shareholders of Compaq, building momentum for the merger. /27 On the same date, the U.S. Federal Trade Commission closed its investigation of the proposed merger between Compaq and Hewlett Packard, reinforcing the position that the merger will have a beneficial effect on IT competition in the US. /28

With eight days to go until the March 19th, 2002, shareholder vote, HP released a statement urging shareholders to vote in support of the merger. In the letter, HP reurged, “After considering Walter Hewlett’s position, ISS concluded that the Compaq merger provides a better means of maximizing long-term value. We would have expected that Walter Hewlett would accept the ISS decision as a careful, thoughtful conclusion reached by an independent expert. Instead, he immediately issued a statement that, ISS has missed the point.’ ISS missed nothing–they simply disagreed with Walter Hewlett’s position and concluded that HP shareowners should vote “FOR” the merger.” /29 The letter goes on to further add, “Was all of this really necessary? HP’s board spent 2 ½ years evaluating ways to address HP’s challenges and to capitalize on new opportunities for growth. Every HP director attended each of these key board meetings–every director, that is, except for Walter Hewlett. If Walter Hewlett had taken the time to attend these board meetings, he might have had a better understanding of why the merger with Compaq is the single best alternative for HP shareowners; maybe he would have joined with all the other HP directors in actively supporting the merger; maybe this proxy contest never would have happened” /30 With the vote just days away, HP began to promote the support that it received in support of the merger, from industry leaders, key institutions and customers. /31

On March 19, 2002, the vote on the merger took place and shortly afterwards, both Compaq and HP were issuing statements stating that they believed that they had sufficient votes to approve the merger. /32 (the actual vote count would take about four weeks to complete). A week later, a NEW YORK TIMES article stated that the largest challenge for Fiorina lay ahead. While she may have won the merger vote, she would need to over see the actual merger, calm employees who feared layoffs, and deliver the upturn in profits as promised and reunite a divided shareholder base. /33

Ten days after the vote, Walter Hewlett took the fight to court in an effort to block the $24 billion deal. His suit stated that HP used corporate assets to ‘entice and coerce’ a large institutional shareholder [Deutsch Bank] into switching its votes in favor of the merger. The suit also claims that HP misled voters with inaccurate predictions of post merger estimates of profits and layoffs. The suit asked for the case to be expedited and that an injunction issue to stop the merger from taking place. /34

Within days, HP announced that it did not intend to renominate Walter Hewlett to the HP board over concerns about his lack of candor and issues of trust. Originally, the board intended to have talks to restore a working relationship following the intense five month proxy battle, and then restore Hewlett to the board. According to board members, the lawsuit was the final straw. The board stated, “His recent actions have again violated basic principles of trust and his ongoing adversarial relationship with the company undermines the board’s ability to effectively conduct business.” /35


The above scenario is a classic example of the escalation of a conflict as related by Rubin in Social Conflict. One model of escalation states that doing well then turns into winning and eventually turns to hurting the other. This occurs when one party moves from doing well and adds a competitive component that turns doing well against an objective standard into doing well by outdoing or hurting the other party. Once one party has experienced pain, they in turn will find retribution by inflicting pain upon the other party in retaliation, and it creates a cycle where each party tries to outdo the next. /36

As escalation intensifies, one model is the conflict spiral model that holds that escalation results from a vicious cycle of action and reaction. One party’s contentious tactics encourage a contentious reaction from the other, which provokes further contentious behavior from a party. Completing the circle and starting it on its next iteration. Each reaction is more severe and intense that the action that provoked it. As the conflict escalates, the blows become heavier and heavier as the conflict escalates. Causation can flow in both directions. /37

Several motives are at work in the conflict spiral model: blame, anger, fear, and image threats. Blame means faulting another for unpleasant behavior. Blame produces a rational desire to retaliate against the other’s provocation, in order to deter such behavior in the future. Anger is aggression that is provoked by the harsh actions of another person. Blame and anger are found in retaliatory spirals, where each party punishes each other for its actions. /38

Fear is prominent in defensive spirals, where each party is trying to protect itself from the other’s actions that it finds aversive. Image threats involve the way that a party regards itself. Escalation is likely to occur when there are threats to a party’s image of power, status, forcefulness, adequacy, autonomy, loyalty, or integrity. /39

The above fact situation is a clear conflict escalation. What began as a question of priorities between HP board members, escalated into a proxy fight, which eventually became an all out war of litigation in a courtroom battle. Carly Fiorina and the HP board members had made a decision to try to move HP forward by merging with Compaq. Walter Hewlett, believing their projections to be inflated, wished to protect his personal assets, which consisted mostly of HP stock. The escalation begins with Hewlett approaching board members and Fiorina reacting with words like “surprise” and “insult”.

Thus, the cycle was started and Hewlett took it to the next level, when he involved the Packard Foundation and then went to The Wall Street Journal and tried to announce an alternative plan. Fiorina and HP retaliated with a letter to shareholders, with much stronger and personally insulting language, calling Hewlett an “academician and a musician.” HP clearly stated that Hewlett didn’t know the business or the industry and that he didn’t know what he was talking about. Shortly thereafter, the Chairman of Compaq uses words like ‘battle lines are drawn’ and stated that Hewlett would be forced to resign from the board.

HP called Hewlett “a man without a plan” and attacked his price/earnings ratio stock plan as ludicrious. The blame and anger cycle continued in a retaliatory fashion as Hewlett sought to find a replacement for Fiorina without consulting any other board member. HP reacted with strongest of language, calling the actions of Hewlett “outrageous”, “blemish on the character of HP”, “lacking integrity”, “reflecting desperation” , and “conduct unbecoming”.

The next round in the cycle came when Hewlett dismissed the ISS backing of the merger. HP reacted with very strong language, stating that Hewlett had not attended board meetings and he was uninformed and if he was informed, he wouldn’t have created the proxy fight. Next came the vote and the fight became an all out war when Hewlett filed suit and HP retaliated by removing him from the board of directors.

There were several points in the escalation when someone could have stepped in and tried to mediate the process, removed the image threats and tried to get the parties back on the same side of the table. The question that would have to be answered is if it was worth salvaging a relationship with a board member who had a large number of shares, but seemed to be out of touch with the actions of the other board members. Or was Hewlett a Don Quixote, truly believing in and fighting a battle that no one else would take on, in an effort to defend the company that his father began?

Deteriorating relationships cause community polarization to persist even beyond the end of a particular conflict incident. /40 The final outcome of the vote had HP taking 52% and Hewlett taking 48%–severely polarizing the company. /41 This type of residue can encourage development of further conflict and escalation tactics when further conflict arises. In this case, the Hewlett suit was dismissed on May 1, 2002, by the judge, but Hewlett vowed to fight on against the board. /42 This case has drawn a wide audience through the media and it is likely that this is a conflict that the audience does not care to see end. /43 Perhaps this type of conflict is good, in that it allows for controlled growth and free airing of differences. Not all conflict is of a nature that it should be stopped or controlled.

Mediators need to ponder not only how to stop people from fighting destructively, but how to improve the way that they fight. There are many subtle benefits to fighting, which timid mediations do not adequately address. If one is searching for authenticity or truth at a deep level, there are times when this cannot be achieved if we do not permit or even encourage constructive ways of fighting. /44 That may be the greatest lesson for everyone involved in this proxy fight–from the CEOs to the shareholders. Through positive fighting, the parties may come to see that they rarely get what they want through fighting. That the most positive way to satisfy their interests is through dialogue, problem solving, negotiation and conflict resolution. /45 The question that the participants in this proxy battle should be asking themselves is, could there have been a better outcome, a win-win outcome with a saving of resources, if this battle had been mediated and a conciliation reached? Or was this fight the outgrowth of challenges facing the company that could only be resolved with a winner and a loser? One has to look at all of the time and money expended and the harsh feelings left for over half the shareholders and employees, and then wonder if this was a fight that could have been conciliated to a mutually satisfactory outcome? When a future of a company is at stake and it is clear that many will not survive the merger, perhaps conciliation is not possible, but controlled fighting is the only way to resolve the upward, but painful growth.


1. “Hewlett Packard and Compaq Agree to Merge, Creating an $87 Billion Global Technology Leader”,;

2. Id.

3. Id.

4. Id.

5. Neel and Scanlon, “Can the HP Way Become the Compaq Way?”

6. “HP Statement on Hewlett Announcement,”

7. “HP and Compaq Issue Joint Statement in Response to Packard Foundation Announcement”,

8. “HP Board Members Fully Committed to HP Leadership and Compaq Transaction”,; “HP and Compaq Issue Joint Statement in Response to Packard Foundation Announcement”,

9. “Compaq Board of Directors Responds to Walter Hewlett Letter”,

10. “Fiorina: The Deal is “The Right Thing for Shareholders'”,

11. Id.

12. Id.

13. Id.

14. “HP Compaq Proposed Merger Receives Clearance from Canadian Competition Bureau”,

15. “European Commission Clears Proposed HP-Compaq Merger”,; “European Commission Clears HP-Compaq Merger”,

16. “HP Issues Statement and Sends Latest Letter to Shareowners on Compaq Merger”,

17. Id.

18. Id.

19. Id.

20. Id.

21. Burrows, “What’s the Truth about Walter Hewlett?”,

22. “HP Board Members Send Letter to Shareowners Addressing Hewlett’s Inconsistencies”,

23. “HP Statement on Walter Hewlett’s Use of Deceptive Claims About Value Creation to Mislead HP Shareholders,” www.; “Members of HP Board’s Compensation Committee Issue Letter to Walter Hewlett”,

24. Id.

25. “HP Issues Statement Regarding Hewlett Action to Recruit New CEO”,

26. “ISS Recommends HP Shareowners Vote FOR Merger”,

27. “ISS Recommends Compaq Shareholders Vote For Merger”,

28. “Federal Trade Commission Clears Proposed HP-Compaq Merger”,; “Federal Trade Commission Clears HP-Compaq Merger”,

29. “HP Issues Letter to Shareowners Highlighting ISS Support, the Case for Change”,

30. Id.

31. “Industry Leaders Voice Support for HP-Compaq Merger”,; “Momentum Continues for Merger of HP and Compaq”,;

“Major Customer Wins Highlight HP’s Strength in High-end UNIX Computing”,; “Support for HP-Compaq Merger Twice as High Among Non-family Institutions that Have Announced Their Intent”,

32. “Compaq Issues Statement on HP Vote”,; “Compaq Shareholders Overwhelmingly Approve Hewlett-Packard Merger”,; “HP Comments on Compaq Vote”,; “Compaq: Shareholders Approve HP Deal”, // story&cid= 578&u=/nm/20020320/ts_nm/tech_cor; Said, “HP Claims Victory”,; “Compaq Investors Approve HP Merger”,// =530&u=/ap/20020321/ap_on_hi_te/hp; Cha &Musgrove “Compaq Merger is Endorsed”,; Sarkar, “Deal with HP Gets Thumbs Up From Compaq”, bin/article.cgi?f=/c/a/2002/03/21/BU164790.DTL

33. “What Price Merger?”,

34. “Hewlett Heir Files Lawsuit to Overturn Merger Vote”,; Cha, “Hewlett Sues HP On Merger Voting”, dyn/articles/A33506-2002mar28.html.

35. Fordahl, Matthew, “HP Won’t Nominate Hewlett for Board”,

36. Rubin, Pruitt and Kim, Social Conflict: Escalation, Stalemate, and Settlement, McGraw-Hill, Inc., 2nd ed., 1994, New York, New York, p.68.

37. Id. at 72-81.

38. Id. at 77-79.

39. Id. at 80-81.

40. Id. at 110.

41. Lohr, “Suit Against Hewlett Deal is Dismissed”,

42. Id.

43. Id. at 134.

44. Cloke, Mediating Dangerously, Jossey-Bass Publishers, San Francisco, Ca, 2000, p. 186.

45. Id. at 191.


Dana Tait

Dana Tait is presently an LLM Student in Dispute Resolution Studies at The Straus Institute at Pepperdine University in Malibu, California. She graduated with a JD from Southern Methodist University and was in insurance and commercial litigation for 8 years. She ran a mediation practice for 4 years, mediating 325… MORE >

Featured Members

View all

Read these next


Book Review: Staying With Conflict: A Strategic Approach To Ongoing Disputes

Bernard Mayer, Staying with Conflict: A Strategic Approach to Ongoing Disputes (Jossey-Bass 2009)In his newest book, Staying with Conflict, Bernie Mayer urges “conflict professionals” to think of ourselves as specialists...

By Jan Frankel Schau

The Time for Dispute Resolution Alternatives (DRA) has come

Dispute Settlement Counselby Michael Zeytoonian.There was a time, not long ago, when those who found themselves in a dispute had two basic choices: They could either file a lawsuit/initiate some...

By Michael A. Zeytoonian

The Effect of Power in Mediation

Introduction Balancing power is an important part of mediation. It is a skill that mediators must cultivate. Mediation parties often have different types and levels of power, which they may...

By Felicia Staub