HP INC — Proxy Solicitation & Information Statement 2002

Feb 20, 2002

DFAN14A 1 f77503h8dfan14a.htm FORM DFAN14A Walter B. Hewlett Definitive Additional Materials PAGEBREAK

SCHEDULE 14A (RULE 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

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HEWLETT-PACKARD COMPANY

(Name of Registrant as Specified In Its Charter)

WALTER B. HEWLETT, EDWIN E. VAN BRONKHORST AND THE WILLIAM R. HEWLETT REVOCABLE TRUST

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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1	Day of announcement
2	Walter Hewlett is not a member of this committee and has no veto power over
its decisions
3	Formerly Chief Investment Officer of Stanford Management Company, running
Stanford’s $10B endowment
4	Includes a majority of non-family members, amongst them two senior retired
HP executives

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Note: Stock data through 2/15/02

1 This index is comprised of companies used by Goldman Sachs in performing its “Selected Companies Analysis” in connection with rendering its fairness opinion to HP relating to HP’s proposed merger with Compaq and includes Apple, Accenture, Computer Sciences, Dell, EDS, EMC, Gateway, IBM, KPMG Consulting, Network Appliance, Sun. Index is weighted by shares outstanding.

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1	Carly Fiorina speaking on CNBC Squawk Box 2/7/02
2	HP/Compaq multiple paid is based on Compaq FY02 EPS estimate from First Call
and HP price as of February 15, 2002, based on deal ratio of 0.6325 HWP shares
for each share of CPQ. Historical forward P/E ratios are based on terms of the
deal as per company filings at time of announcement and target First Call EPS
estimates for the next fiscal year on the day prior to the announcement of the
deal.

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| 1 | Based on HP’s closing share price of $20.36 on February 15, 2002, and the
announced exchange ratio of 0.6325 and Compaq’s First Call consensus EPS
estimate of $0.27 for calendar year 2002. |
| --- | --- |
| 2 | Based on HP’ First Call consensus earnings estimate of $1.15 for calendar
year 2002 and closing share price of $20.36 as of February 15, 2002. |
| 3 | Based on First Call estimates as of February 15, 2002 |
| 4 | Based on pro forma combined EPS calculated based on standalone First
Call estimates and excluding the impact of revenue losses and cost
savings. |
| 5 | Based on First Call estimates as of August 31, 2001 |

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| 1 | For complete detail on sources, see page 49 of the “Report to the Trustees
of the William R. Hewlett Revocable Trust on the Proposed Merger of
Hewlett-Packard” filed with the SEC under cover of Schedule 14A on
11/16/2001, as amended. |
| --- | --- |
| 2 | Analysts’ estimates exclude Salomon Smith Barney as they are advisers to
Compaq |
| 3 | Parties to Walter Hewlett proxy solicitation |
| 4 | “HP Position on Compaq Merger,” 12/19/01, p. 27 |
| 5 | Represents post-deal 1999 performance vs. analyst estimates. For complete
detail see p. 50 of reference in footnote No. 1 |
| 6 | “Computer company” results outlined in McKinsey Quarterly, “Why Mergers
Fail,” 2001 Number 4. (Name of actual company disguised in article). In
early 2001, HP retained McKinsey & Co. to assist in HP’s evaluation of
strategic alternatives and potential acquisition candidates including
Compaq |
| 7 | Sun 10Q, 10K, Sun 1/18/02 earnings press release. Represents 12 month
period ending 12/31/01, (FY ends 6/30) |
| 8 | HP 11/14/01 earnings press release. Represents 12 month period ending
10/31/01 (excluding restructuring and merger-related costs) |
| 9 | Apple FY2001 10K. Represents 12 month period ending 9/29/01 |
| 10 | Compaq earnings press release 1/16/02. Represents 12 month period ending
12/31/01 (excluding restructuring and merger-related costs) |
| 11 | Morgan Stanley, “Gateway: Better Margin Structure, Lower Rev Run Rate,”
1/8/02, page 3 |
| 12 | FFL/Parthenon assumption based on historical experience of tech companies,
revenue loss in services, and high fixed cost assumptions post planned cost
synergies |
| 13 | Amendment No. 2 to HP S-4, 1/14/02, p. 53 “...weighted average contribution
margin of 12%...” |

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| 1 | Based on assumptions similar to management’s outlined on page 30 of HP
“Position on Compaq Merger,” 12/19/01. Present values, except for core
dilution and cost to achieve savings, calculated as of February 19, 2002
based on a 20x forward price-earnings multiple applied to net earnings
impact in calendar year 2004. Assumes 26% marginal tax rate |
| --- | --- |
| 2 | Assumes net pre-tax cost savings in calendar year 2004 of $2.0 billion
based on $2.5 billion in cost savings and $0.5 billion in lost profit on
lost revenues. Lost profit calculation assumes $84.0 billion in revenue in
calendar year 2004 before revenue losses, 4.9% revenue loss, 12%
contribution margin. |
| 3 | Represents the value of the core dilution of the transaction before the
realization of cost savings at HP’s current 2002 calendar year
price-earnings multiple of 17.7x. Calendar 2002 pro forma earnings before
cost savings calculated based on First Call consensus earnings estimates of
$1.11 and $1.35 for HP for fiscal years 2002 and 2003, respectively, and
$0.27 for Compaq for its fiscal 2002. Under management’s present value
methodology, the core dilution has a value of $3.56 per share based on
calendar 2004 earnings estimates. |
| 4 | Realistic case based on $1.3 billion restructuring charge established in
connection with Compaq’s acquisition of DEC in 1998, which also involved
approximately 15,000 layoffs, and the $635 million in retention bonuses
announced by management in the proposed HP/Compaq merger. In fiscal 2001,
HP took a $384MM charge for a restructuring it estimated would result in
annual cost savings of approximately $500MM. Downside case based on 50%
premium to realistic case (11.4% of transaction value). Compaq/DEC
restructuring charge as a percentage of transaction value was 13.5%.
Excludes the impact of new employment agreements with Ms. Fiorina and Mr.
Capellas. Assumes cash is paid out ratably over the first six months
following closing |
| 5 | Realistic case based on BofA, “Hewlett-Packard: “Management Turns up the
Heat,” 12/19/01 base case of 87.8% of management estimate realized in 2003
($1.8 billion assumed vs. management estimates of $2.1 billion). Downside
based on BofA downside case 75.6% of management estimate realized in 2003
($1.6 billion assumed vs. management estimates of $2.1 billion) |
| 6 | Realistic case based on historical experience of tech companies, revenue
loss in services, and higher fixed cost assumptions post planned cost
synergies. See analysis presented on p. 21-26. Downside case based on
discount to Compaq/DEC transaction. |
| 7 | Realistic case assumption based on historical experience of tech companies,
revenue loss in services. Downside case based on discount to McKinsey
computer company example (see “Revenue Loss Benchmarks” on p. 12) |

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1	Based on First Call estimates as of August 31, 2001
2	Based on First Call estimates as of February 15, 2002
3	See page 19 of this presentation

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| 1 | Based on First Call consensus earnings estimates of $1.28 and $0.42 for HP
and Compaq, respectively, as disclosed in HP 425 Filing 12/19/01, a 26.0%
effective tax rate and zero net interest expense and other income. |
| --- | --- |
| 2 | Based on management estimated pre-tax cost savings of $2.1B and revenue
loss of 5% with 12% contribution margin in FY 2003 as disclosed in HP 425
Filing 12/19/01. |
| 3 | $6.9B in operating income as disclosed in HP 425 Filing on 12/19/01. |

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| 1 | Based on actual results from FY 2001 and segment projections from Bernstein
research dated 12/18/01. |
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| 2 | Based on actual results for CY 2001 for Compaq, actual results for FY
2001 for HP and segment projections for HP from Bernstein research dated
12/18/01 and segment projections for Compaq from Banc of America research
dated 1/17/02. |

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| 1 | Data sources for market segment growth as follows: Imaging and Printing
from Lyra research and IDC report entitled “U.S. Inkjet and Laser Printer
Installed Base and Supplies Market Forecast and Analysis, 2000-2005,” PC
and Access based on IDC PC tracker forecasts. |
| --- | --- |
| 2 | Operating margins and revenue numbers based on actuals and BoA research,
2/4/02 |

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1 The Wall Street Journal, December 17, 2001, emphasis added.

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| 1 | Adjusted for share splits and stock dividends, the Goldman Sachs Comparable
Index is comprised of companies used by Goldman in performing its “Selected
Companies Analysis” in connection with rendering its fairness opinion to HP
relating to HP’s proposed merger with Compaq and includes AAPL, ACN, CSC,
DELL, EDS, EMC, GTW, IBM, KCIN, NTAP, SUNW, weighted by shares outstanding. |
| --- | --- |
| 2 | 1998 and 1999 Standalone estimates from First Call, as of January 20,
1998(Forecast before DEC). 1998, 1999 and 2000 Combined estimates from
First Call, as of August 1, 1998 (Forecast after DEC). 2002 and 2003
estimates from First Call, as of February 15, 2002. All actuals from First
Call. |

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| 1 | Share price performance relative to Goldman Sachs comparable company index
from the day prior to transaction announcement to three years later for
Compaq (Tandem and Digital) and relative to Dow Jones Industrial Average
for Burroughs/Sperry. |
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| 2 | Share price performance relative to Goldman Sachs comparable company index
from the day prior to transaction announcement to February 15, 2002 for
Compaq (Tandem and Digital) and relative to Dow Jones Industrial Average
for Burroughs/Sperry. |
| 3 | Based on First Call Consensus estimates, day prior to announcement of $1.47
and $1.77 for Compaq/Tandem and Compaq/Digital, respectively and Burroughs
management estimate of $2.66-$3.00 for Burroughs/Sperry. Accretion/Dilution
based on Compaq EPS of $0.47 and $0.32 for FY1998 and FY1999, respectively
and Unisys EPS of $2.93 for FY1987. |
| 4 | Based on First Call Consensus estimates, day prior to announcement of $1.47
and $1.77 for Compaq/Tandem and Compaq/Digital, respectively and Burroughs
management estimate of $2.66-$3.00 for Burroughs/Sperry. Accretion/Dilution
based on Compaq EPS of $0.97 and $0.15 in 2000 and 2001, respectively, as
per First Call. Not meaningful for Burroughs/Sperry (later Unisys) due to
loss of $(4.71) per share in FY1989, excluding non-recurring and
extraordinary items. |

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| 1 | In CY2001, Compaq lost $587MM on PC revenue of $15.2B and HP was projected
to lose $192MM on PC revenue of $9.1B, see Definitive Proxy filed with the
SEC on 2/5/02. |
| --- | --- |
| 2 | Goldman Sachs, “Goldman Sachs IT Spending Survey: United States,” 2/4/02,
pg. 17 |

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1	HP 425 Filing, 12/19/01, p. 44
2	UBS Warburg Alpha Customer Study, “Hewlett-Packard: It’s About Revenues,”
12/13/01

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Source: Factory Revenue as reported in IDC Server Tracker database for 1st 3 quarters of 2001. Price range categories defined by IDC: “Entry” is less than $100k; “Mid-Range” is $100,000-$999,999; “High End” is $1MM+

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Source: IDC 2001E data based on report “Worldwide Disk Storage Systems Market Forecast and Analysis, 1999-2005”, December, 2001. Internal includes internal “JBOD”. SAN is “Storage Attached Network,” NAS is “Network Attached Storage,” DAS is “direct attached storage.” Compaq is $20MM in NAS. External Direct Attached is direct attached storage excluding external JBOD and all other internal direct attached storage

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| Source: |
| --- |
| 1 IDC Report: “Worldwide IT Services Industry Forecast and Analysis, 2000-2005,” July 2001 |
| Note: Condensed IDC’s eleven services categories into four. Support
includes “Hardware support and installation” and “Packaged software
support and installation” Outsourcing includes: “Processing Services,”
“IS Outsourcing,” |
| “Application Outsourcing,” and “NetworkInfrastructure Management”
segments as defined by IDC. IT Consulting includes: “IT Consulting”
and “IT Training and Education” as defined by IDC. Systems Integration
includes |
| “Systems Integration,” “Custom application development and
maintenance,” “Network consulting and integration” as defined by IDC.
Growth rates represent weighted averages of the re-categorized groups,
p. 16-31 |

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Sources: HP 10-K filed 1/29/02, Hoover’s Online, HP Website

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1	Compound annual stock growth from date of CEO departure until 2/15/02
2	Interim committee appointed to appoint CEO. In the interim period, Fred
Anderson, executive VP and CFO, acted as CEO. Steve Jobs ended up as CEO.
3	Date of Jill Barad departure; Eckert assumed CEO position on 5/17/00
4	Departure of co-CEO David Mahoney
5	Resignation of Carl Yankowski. Eric Benhamou chosen as interim CEO

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| 1 | Based on HP 10/31/01 10-K and Bernstein research dated 12/18/01. Excludes
$0.4B in restructuring and acquisition-related charges. Total EBIT includes
$0.4Bn in other losses and eliminations. |
| --- | --- |
| 2 | Based on revenue growth and margin assumptions detailed on pages 36 and 37. |
| 3 | Historical FY 1998 to FY 2000 average operating income margin was 8.8%. HP
reported an overall operating income margin of 6.3% in the first quarter of
fiscal 2002. HP’s standalone First Call estimate of $1.35, as of February
15, 2002, for fiscal 2003 implies an operating income margin of 6.9% based
on a 22% effective tax rate and zero net interest expense and other income.
Banc of America Securities projects an operating income margin of 7.4% in
fiscal 2003 under management’s current strategy and incorporates estimated
impact of pre-closing negative revenue synergies. |

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| 1 | Estimated potential share price in fiscal 2003. Prior presentations of the
value impact of the proposed merger excluded the impact of potential
multiple compression. This analysis excludes the impact of the costs to
achieve potential cost savings. |
| --- | --- |
| 2 | Based on assumptions detailed on pages 36 and 37. |
| 3 | Based on First Call consensus estimate as of February 15, 2002 based on
company’s existing strategy. |
| 4 | Based on consensus earnings estimates for HP and Compaq of $1.35 and $0.45,
respectively, for HP’s fiscal 2003, $1.8 billion in pre-tax cost savings,
10% revenue loss, 25% contribution margin, and 26% effective tax rate. |
| 5 | Management assumption based on 425 filing of 12/19/01. |
| 6 | Based on current First Call consensus estimate of $1.11 for fiscal 2002 and
closing share price of $20.36, as of February 15, 2002. |
| 7 | Based on HP First Call fiscal 2002 EPS estimate of $1.05 and HP’s closing
share price of $23.21 on August 31, 2001. The weighted average
price-earnings multiple of an index of comparable companies increased from
21.6x to 26.4x from August 31, 2001 to February 15, 2002. The index of
comparable companies is comprised of the same companies used by Goldman
Sachs in performing its “Selected Companies Analysis” in connection with
rendering its fairness opinion to HP on its proposed merger with Compaq,
excluding EMC, Gateway, Sun Microsystems, and Network Appliance because
their price-earnings ratios were not meaningful as of February 15, 2002. |
| 8 | Based on lowest end of price-earnings multiple range used in December 19,
2001, HP Position on Compaq Merger presentation, page 29. |
| 9 | Based on HP’s current fiscal 2002 price-earnings multiple of 18.3x applied
to HP’s current First Call consensus earnings estimate of $1.35 for fiscal
2003. |

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| 1 | On 9/5/01, Moody’s downgraded HP from Aa3 to A2, and placed Compaq under
review for possible upgrade from Baa2. S&P placed ratings watch on HP with
negative implications and on Compaq with positive implications on 9/4/01. |
| --- | --- |
| 2 | Compaq missed its 2000 and 2001 earnings forecasts at the beginning of each
year by 11.0% and 87.3% whereas HP missed by 1.1% and 63.5% for the same
periods. |
| 3 | Based on average next twelve months price earnings multiple from StockVal
data from 10/25/91 to 8/31/01. |
| 4 | Based on management projections contained in 425 filing dated 12/19/01. |
| 5 | Based on realistic case pro forma EPS (see page 36 and 37 for detailed
assumptions) excluding pro forma amortization of intangibles. |
| 6 | Based on monthly Barra predicted beta from 12/92 to 9/01. |
| 7 | Based on First Call revenue estimates for each company’s fiscal 2003 as of
2/15/02. |

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| 1 | Management projected long-term growth estimates for the combined company
from HP 425 Filing 10/25/01. |
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| 2 | Management combined company segment growth estimates before revenue losses
calculated based on segment operating incomes, segment operating margins
and segment revenue losses from HP 425 Filing 12/19/01. |
| 3 | Based on weighted average projected growth rates from IDC for the following
segments: inkjet hardware (1.8%), monolaser hardware (4.3%), color laser
hardware (14.7%), inkjet supplies (11.9%), laser supplies (15.5%), digital
cameras (12.5%) and scanners (7.5%). Also includes growth of Multi-
Function printers from Lyra research (2.7%). Growth rates weighted by 2001
market sizes of inkjet hardware ($10.1B), monolaser hardware ($9.9B), color
laser hardware ($7.0B), inkjet supplies ($13.6B), laser supplies ($14.3B),
digital cameras ($6.8B), scanners ($4.5B), and MFPs ($7.7B) |
| 4 | Imaging & Printing grown at a premium to management estimated growth rate
due to strategic focus on that business. |
| 5 | Market growth rate based on average of IDC growth rates for Unix servers
(8.4%), NT servers (16.9%), and storage (1.7%), weighted by 2001 segment
revenues estimated by Bernstein research dated 12/01, for Unix servers
($3.3B), PC Servers ($1.7B) and storage ($2.6B) |
| 6 | Based on 0.5x market growth in NT servers and 1.25x market growth in Unix
servers from segment focus. Storage grown at IDC projected rate of 1.7%
from 2001 to 2003. |
| 7 | Market growth rates based on average for IDC growth rates for outsourcing
(12.3%), consulting (11.9%), systems integration (14.2%), and support
(6.1%), weighted by segment revenue in outsourcing ($0.5B), consulting
($0.6B), systems integration ($0.8B), and support ($3.9B) |
| 8 | Based on average of (i) 1.75x IDC sub-segment growth rates for outsourcing
(12.3%), consulting (11.9%), and systems integration (14.2%) (equivalent to
addition of 3,600 consultants at $250K per consultant per year) and (ii)
Bernstein estimates for HP 2000 to 2001 growth rate in support
(6.1%), weighted by segment revenue in outsourcing ($0.5B), consulting ($0.6B),
systems integration ($0.8B), and support ($3.9B). Financing ($1.9B)
projected with flat growth to 2003. |
| 9 | Market growth based on IDC 2001 PC Tracker. |
| 10 | Based on HP growth at IDC 2001 PC Tracker segment growth rates for consumer
and notebook segments, and assuming a 50% contraction of business desktops
based on focus strategy. |

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| 1 | Estimated operating margin target pro forma for the proposed merger. Based
on HP 425 Filing dated 10/25/01. |
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| 2 | Based on HP 10-K filings, excluding non-recurring and extraordinary items. |
| 3 | Based on Bernstein research dated 12/18/01. |
| 4 | From HP earnings release dated 2/13/02. |
| 5 | Based on midpoint of HP 2001 margin and Banc of America Securities 2003
estimate of 13.4% from 2/4/01. |
| 6 | From HP earnings release dated 2/13/02. Management noted that UNIX was
profitable. Therefore, losses likely stemming from NT servers, software and
storage. |
| 7 | Based on Bernstein research 12/18/01 estimates of 12.5% Unix operating
margin for 2001. Also based on operating NT servers and storage at
breakeven and reducing estimated losses in software business by 50% |
| 8 | Estimated operating margin target pro forma for the proposed merger. Based
on HP 425 Filing dated 12/19/01. |
| 9 | Includes financing business as reported by HP 2/13/02. |
| 10 | Based on continued strong performance of services business as reflected in
Q1 FY2002 reported numbers. Finance projected at break-even. Management
anticipates steady state profitability in Finance of 8% to 10% |
| 11 | Based on average of 12/18/01 Bernstein research 2000 and 2001 estimated
Access segment operating margins, weighted by segment revenue breakdown,
and accounting for 50% reduction in commercial PCs per footnote 10 in prior
slide. |

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