HP: Layoffs for some, bonuses for others

While the merger discussions with Compaq continue, HP rewards its key employees

Although it plans to lay off thousands of workers if its merger with Compaq goes through, Hewlett-Packard is also offering hefty bonuses to some 6,000 key employees it wants to keep.

In a filing on Monday with the Securities and Exchange Commission, HP said it would offer the eligible managers and workers a payment equal to half their salary plus a "target bonus". The money would be payable in two instalments, the first upon closure of the deal and the second a year later.

If all eligible employees took advantage of the deal, HP estimates it would pay out $168.5m (£116m) for each instalment. If the merger does not close, no payments will be made under the program.

Details of the bonuses came in a revised, but not final, version of the proxy statement HP will eventually send to shareholders. The company filed an initial draft of the proxy in November.

In Monday's filing, HP also tries to strengthen its financial case for the merger by further outlining the business implications of the deal. The company argues that the $2.5bn in cost savings it believes are achievable would mean the combined company would have to lose nearly 25 percent of its revenue to offset the value of the cost cuts. HP is estimating the combined company's revenue will decline by less than 5 percent. The company also reiterated its belief that the cost savings, excluding the 5 percent revenue loss, equates to $5 to $9 a share in value.

When all is said and done, the battle over the merger will come down to a war of coloured paper.

HP will be looking for shareholders to send in white cards, indicating a vote of approval, while opponents of the deal -- including board member and Hewlett family heir Walter Hewlett -- will be seeking green cards, indicating opposition to the deal.

Since the merger was announced, on Labor Day 2001, the proposal has come under attack from a number of parties, including descendents of HP founders William Hewlett and David Packard. These parties represent about 18 percent of HP's shares.

Walter Hewlett, son of William Hewlett and an HP board member, has said he will solicit votes opposing the deal should HP put the matter to a shareholder vote. HP's largest shareholder, the David and Lucile Packard Foundation, has announced its opposition to the deal, as have David Woodley Packard and two of Hewlett's sisters.

HP took pains in the filing to urge shareholders to vote their shares and outlined the procedure for changing their vote to support the merger. Shareholders may send in as many cards as they choose, although only their most recently dated proxy card will count as their vote.

"The HP board of directors urges shareowners to sign, date and return each white proxy or voting instruction card promptly," the company said in the filing. "The green proxy cards are being sent to HP shareowners by a dissident group soliciting proxies against the proposal. The HP board of directors urges HP shareowners to discard any green proxy or voting instruction card sent by the dissident group."

HP needs the support of a majority of votes cast either by proxy or at the special meeting of shareholders, which is scheduled to take place in the first half of the year. The company also needs shareholders representing at least half the company's shares to cast a ballot.

In addition, the deal requires regulatory approval as well as the support of the majority of Compaq shareholders.

In the filing, HP tries to undermine its sharpest critic, Walter Hewlett, by noting that he was missing from three key meetings in July at which the board deliberated about the deal. For part of one of the meetings in question, Hewlett was performing in an orchestra at the exclusive Bohemian Grove in Monte Rio, California, according to sources.

A representative of Hewlett noted that the board knew he would be unavailable for part of that meeting and refused to reschedule the discussion of the Compaq merger. For another meeting in question, the representative said, Hewlett provided a telephone number at which he could be reached, but he was never contacted.

"This should be about shareholder value," said the representative of Hewlett. "We believe the proposed Compaq merger will destroy shareholder value for both the short and long term."

The just-disclosed bonuses are in addition to previously announced retention bonuses offered top executives. HP also said on Monday that it has agreed to provide 10 of its executive officers with certain benefits if they are terminated without cause or resign with good reason, such as a reduction in pay, within two years after the merger is completed. Any of these executives would be eligible for a payment equal to 1.5 times the executive's base salary and target bonus as well as vesting of stock options and continuation of certain health benefits.

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