A counterpoint to the story of Renault/Volvo is the contest to approve Hewlett-Packard (HP)’s acquisition of Compaq Computer in 2002. HP/Compaq is strikingly similar to Renault/Volvo in several respects: charismatic CEOs, depressed industrial conditions, declining market positions and profitability due to overcapacity in the industry, large prospective synergies, and fierce opposition by employees and influential shareholders. Yet in HP’s case, the merger was approved. The comparison of these two cases highlights the vital roles of credibility of synergies, careful deal design and communication.

In 1993, Maryann Keller, a leading auto industry analyst, published an assessment of the leading automobile manufacturers concluding that “these companies and others would increasingly collide with each other. Too many countries are employing the same systems and technology to produce an excess of the same kinds of products for markets that are not growing fast enough to accommodate them all.”²

Volvo was a small player in the global automotive industry. With an annual output of around 208,000 cars, it ranked 27th in the world. Pehr Gyllenhammar,Volvo’s CEO, argued that Volvo was strategically vulnerable and needed a sizable partner with whom it could obtain advantageous purchasing arrangements, over whose volume of output it could amortize rising new product development costs, and whose deeper financial pockets could sustain Volvo through a moderately severe recession such as it had experienced in 1992. Some observers blamed Volvo’s predicament on Gyllenhammar, pointing out that Volvo’s share price had dramatically underperformed the Swedish stock market index (see Figure 9.1). Although he never discussed other strategic alternatives, he probably faced at least two possibilities, either exit from the auto business, or form a network of smaller, highly focused alliances. Volvo’s strategic predicament suggested that some form of restructuring or change of strategy would be necessary, if not immediately, then over the medium term, but there is relatively little to suggest that a single, comprehensive partnership necessarily dominated other alternatives.

Volvo and Renault had a relatively long history of association, beginning with a components swap agreement in 1971, and deepening with Renault’s purchase of a minority equity interest in Volvo in 1980. Renault sold those shares at the time of its near-bankruptcy in 1985. With the installation of new management in 1986, Pehr Gyllenhammar offered to acquire Renault’s truck-manufacturing business. Renault’s CEO, Raymond Levy, demurred at the time, saying that, as a new executive, he wanted to settle into his new job before deciding on any such proposals. The two CEOs resumed discussions in earnest in the fall of 1989. Levy told me that initially the CEOs explored the concept of a cross-border merger along the lines of Royal Dutch and Shell. For political reasons, a merger was not an option then. The possibility of a merger, however, appears to have colored the thinking of managers in both companies as they announced in January 1990, a “joint venture.” The details of this association did not emerge until September 1990, when it became apparent that this was to be a far-ranging strategic alliance.

The alliance agreement had been a complex engagement of the two firms—indeed, Levy called it a “marriage.” Not only would each ally own a minority interest in the other ally, but also each would own a large minority interest in the other’s auto and truck manufacturing units. The CEOs argued that the direct stakes in each other’s manufacturing units would align the firms with each other’s fortunes and promote industrial cooperation. Not discussed publicly was a complex poison pill provision, which would make it costly for either party to seek to unwind the alliance. In sum, this agreement constituted a significant escalation of commitment between the two firms, and dedicated them to the path of intimate industrial cooperation. Commitment escalated again in 1993 when the two firms proposed to merge.

The firms consummated the alliance with cross-acquisition of shares in January 1991, and over the next two years their endeavor showed modest success. Although slow to gain momentum, purchasing benefits could be foreseen more clearly by 1993. However, important projects for joint design of an auto and rationalization of truck manufacturing were stalling. Interviewees point to many causes, including French protectionism, Swedish-French cultural conflicts, a ponderous alliance bureaucracy of 21 committees, and distant senior leaders. Worse, Volvo’s principal market, North America, slid into recession in late 1991, prompting one of the worst declines in reported financial performance in the firm’s history.

In late 1992, Gyllenhammar and Louis Schweitzer (appointed CEO of Renault upon Levy’s retirement in 1992) secretly began negotiating a merger of the two businesses. Unfortunately, the French Socialist Party, which was in power at the time, vetoed the proposal to privatize the country’s largest state-owned enterprise.When the conservatives came to power in the elections of March 1993, negotiations between the two firms reopened. These talks culminated in the merger proposal announced on September 6, 1993, to form Renault-Volvo RVA.

The Volvo merger prospectus pointed to three main reasons for the merger: (1) to increase competitive advantages, (2) to improve financial strength and the ability to meet new capital requirements (estimated in Volvo’s case to amount to between SEK 5 and 8 billion), and (3) to exploit operating efficiencies in procurement, research and development, and production. Gyllenhammar projected these merger economies to amount to SEK 16.4 billion on an undiscounted basis between 1994 and 2000, over and above those expected from the alliance alone.

The proposed transaction would affect the interests of Volvo shareholders in several important ways:

In summary, the merger proposal offered Volvo’s shareholders participation in the benefits of potential new synergies in exchange for a short position in a bundle of control options (i.e., the golden share, a privatization option concerning the timing and magnitude of any public offering of RVA shares, as well as a noyau dur option concerning the targeted purchasers of any shares offered). Collectively, these options granted the French state significant rights to determine RVA’s strategy.

At the time of the merger announcement, 19.1 percent of Volvo’s votes were presumed to support the merger.³ Gyllenhammar’s task was to increase the supporting coalition to more than 50 percent. The 17 largest investors in Volvo, mainly investment institutions, held 65.4 percent of the votes; the remainder was widely dispersed. Curiously, Gyllenhammar was slow to approach the institutional investors for their support; many of the meetings that ultimately did occur happened at the initiative of the institutions. He seemed inclined to let the deal speak for itself, rather than to be an advocate. Many interviewees suggest that this was consistent with Gyllenhammar’s leadership style focused on grand strategy and vision.

Newspapers and activist investors fanned the growing disbelief of the institutional investors. Two Swedish tabloids immediately condemned the merger, largely on nationalistic grounds. The Association of Individual Investors, a shareholder advocacy group, requested information and met with Volvo’s management twice following the merger announcement. The Association voiced opposition to the merger on October 7 and solicited proxies from its members. It also threatened to sue Volvo’s directors. The opposition coalition accounted explicitly for only about one-third of Volvo’s votes. But this eliminated any chance for a clear larger-than-two-thirds majority and ensured that the directors would have to deal with a lawsuit.Volvo’s blue-collar union expressed support for the merger, believing that the deal would preserve their jobs and possibly seeing some benefit in allying with the Confederation Générale du Travail, Renault’s leftist trade union, but this support for the deal repelled, rather than attracted, the institutional investors. Volvo’s white-collar union, representing 5,000 employees, voiced opposition, as did the union of Volvo’s engineers, representing 900 employees. Three former senior executives of Volvo wrote newspaper columns opposing the deal. Until the end of October, however, Volvo’s institutional investors offered no public comments.

In mid-October, Swedish investors witnessed the spectacle of a management coup at Air France, another French state-owned enterprise. The CEO, Bernard Attali, had sought to cut wages and jobs and to change work rules at France’s worst-performing state ward.The unions struck and began to pressure the government to sack Attali. Swedish investors viewed this confrontation as an acid test of the French government’s resolve to run state enterprises in a businesslike fashion, a crucial condition for them to realize acceptable returns from RVA.When Attali was fired on October 16, investors’ doubts about the French connection gained momentum.

The institutional investors remained silent until they saw the formal merger prospectus, published on October 26. Several institutional investors had hoped that the prospectus would present a detailed justification for the projected merger synergies, and that it would value Renault and Volvo’s automotive assets as a foundation for justifying the share exchange ratio in the merger. However, the prospectus gave no information beyond what was already in the public domain. The patience of the institutional investors snapped.

Within three days, two institutions, the 92-94 Fund (2.5 percent of Volvo’s votes) and SPP Insurance (4.5 percent), declared their opposition to the deal, and a third, Skandia Insurance indicated that it would delay its decision. Two of Stockholm’s leading investment managers published a newspaper article condemning the deal and calling for Gyllenhammar’s resignation. They wrote, “We don’t like the proposed Renault agreement, and we don’t like the way Volvo has been abused over the years.”⁴ Reeling from the tide of institutional opposition, Gyllenhammar agreed to postpone the shareholder meeting by one month in order to give the institutions added information and time for them to assess it.

On November 4,Volvo’s operating managers, at a golf outing in Marbella, Spain, told journalists that nine-month profits in Volvo’s truck segment would be up sharply, indicating a strong recovery from a year earlier. This was confirmed at the formal release of nine-month figures on November 18. These revelations triggered a fresh round of accusations from the institutions that the merger had been negotiated when Volvo had been at a cyclical low in cash flows and that now, in the face of a buoyant recovery, the automotive business was being given away. More importantly, the buoyant reports turned the merger debate toward the central issue of valuation. An institutional investor was quoted as saying:

In mid-November, Gyllenhammar undertook two efforts to elicit institutional support for the merger. First, he tried to reopen its merger negotiations with France, only to be rejected. The French minister of industry did issue a letter guaranteeing that the government would not exercise its golden share against Volvo as long as Volvo’s equity interest in RVA did not exceed 35 percent.This letter was unsatisfactory to the institutions. Second, Volvo said that it would initiate a large (SEK 5 billion) rights offering if the merger were not approved. The institutions viewed this as an attempt to intimidate them, as it ignored the possibility of selling nonautomotive assets to finance the car and truck segments.

Two more funds expressed their opposition on November 24 and 29, and on November 30 Skandia Insurance announced that it would vote against the proposal.Volvo’s largest institutional investor, the Fourth Fund, announced that it would vote for the deal. Six days later, however, the Fourth Fund announced that it would reconsider its previous commitment to vote in favor. The Fourth Fund’s board had barely approved its support for the deal, with a vote of 8 to 6, and only after very heavy lobbying by Volvo’s blue-collar union representatives on the board.

As Volvo’s board meeting approached on December 2, the largest bank in Scandinavia, S-E Banken (SEB) announced that it would vote “no.” In explaining SEB’s opposition, the CEO said:

In a surprise move on December 2, twenty-five senior managers informed the board of their opposition to the merger, leaving Pehr Gyllenhammar, Volvo’s executive chairman, isolated in his own company. On that date, the board withdrew the proposal; Gyllenhammar and four directors resigned.

The significance of certain institutional announcements in the final days before the board meeting is worth noting. S-E Banken was the largest bank in Scandinavia, on whose board Gyllenhammar served as a director. Skandia Insurance was the largest insurance company in Scandinavia, and a firm with which Gyllenhammar had personal ties. Gyllenhammar’s father had been CEO of Skandia, as had Gyllenhammar himself in his early thirties. Gyllenhammar’s inability to sway these two “lead steer” institutions may have signaled to Volvo’s board the strong hostility of institutional investors to the deal.

From publication of the prospectus (October 26) to the withdrawal of the proposal (December 2), the period when institutions expressed their “voice,” the returns are significantly positive. The abnormal return on shares over all trading days was +28.33 percent. Investor activism rewarded Volvo’s shareholders.

Following the board’s rejection of the deal, a coalition of the activist Swedish institutional investors jointly nominated a new board of directors in December 1993 and called for a special shareholders’ meeting, which elected them in January 1994. Volvo’s management negotiated a dissolution of the strategic alliance with Renault. This reversed the cross-shareholdings in the two firms’ operating units. Also, Volvo’s management announced a new strategy for the firm that entailed focusing on the automotive industry.Volvo would sell investments in other businesses and use the proceeds to finance the development of new products. In addition, Volvo would remain independent, possibly exploiting small highly focused alliances but avoiding mergers and complex alliances.Volvo’s share prices recovered dramatically in the weeks following the withdrawal of the merger proposal, nearly doubling by the annual meeting in April 1994.The French government partially privatized Renault in October 1994.

Ultimately, Gyllenhammar’s strategic assessment of Volvo’s vulnerability was sustained. Unable to achieve major efficiencies through a loose network of alliances, AB Volvo sold its automobile manufacturing operation to Ford Motor Company on March 31, 1999.

By 1999, however, it was a matter of debate whether The HP Way was an effective response to the new challenges in the technology sector. Although innovation was still critical to long-term success, HP’s industry was maturing.With that came the additional pressure of slimming margins, the importance of distribution efficiencies, and a need for developing long-term relationships with customers. Simply being a component manufacturer was not a viable mission for HP.

In July 1999, HP’s CEO, Lewis Platt, retired. The board of directors named Carleton (Carly) S. Fiorina as president and CEO. After nearly 20 years at AT&T and Lucent Technologies, she had become the first company outsider named CEO in HP’s 60-year history. Fiorina’s challenge to lead “HP’s reinvention as a company that makes technology work for businesses and consumers”⁹ was no small task. She sought to transform HP “into the hottest new company of the Internet era without losing contact with the old-time commitment to quality and integrity that made the Hewlett-Packard name so trusted.”¹⁰ As an outsider she faced many existing HP managers who had developed under Bill Hewlett and Dave Packard’s tutelage and subscribed to The HP Way.

In the midst of an increasingly competitive business environment, throughout 1999 and 2000, Hewlett-Packard’s board of directors and executive management evaluated numerous alternatives for business growth to secure the company’s viability. Although HP’s Imaging and Printing Group (IPG) dominated its market segment, the company did not rank among the top three among competitors in personal computers, servers, storage, or services. Furthermore, HP’s long-term dominance in imaging and printing was continually being challenged by Lexmark and Epson, who were selling inexpensive, lower quality printers in a bid for market share.

Recognizing the need to build strong complementary business lines while maintaining its strength in imaging and printing, the board of directors evaluated a range of strategic alternatives aimed at improving the company’s position in enterprise computing and services.

Perhaps influenced by IBM’s very successful 1990s turnaround, by mid-2000, HP’s board and management settled on a strategy of developing the company’s IT services business. IBM’s Global Services group, which offered tailored “end-to-end” hardware, software, and business process solutions to customers, was the success story that emerged from the outmoded, pre-turnaround Big Blue. In gaining and retaining technology customers by viewing them as the business clients they ultimately were, IBM Global Services really had no other single solutions competitor in the highly fragmented IT services sector. As described by Louis Gerstner in his account of the IBM turnaround, in 1994 IBM had seen services as key to growth:

In 2000, HP was pursuing a strategy to expand its services business through both organic growth, fueled by increased investment in its services business, and possible acquisitions. HP subsequently entered into discussions to acquire the consulting services business of PricewaterhouseCoopers LLP (PwC). However, by fall 2000, these discussions had stalled. In early 2001, HP retained the services of McKinsey & Company to assist in its continued effort to implement the new strategy.

Also in 2000, Compaq directors had grown impatient with Compaq’s poor performance and were encouraging Compaq’s CEO, Michael Capellas, to explore a potential business combination with another computer company. Capellas subsequently presented to the board the relative strengths and weaknesses of potential pairings with companies such as Dell, Sun, EMC Corporation, and Hewlett-Packard among others, and according to Capellas, the strengths of a combined HP and Compaq were “intuitively obvious.” “We wanted to be the next IBM,” Capellas said.¹²

Discussions of a business combination between Hewlett-Packard and Compaq began in June 2001, during licensing conversations between the two companies. Carly Fiorina contacted Michael Capellas to discuss Compaq’s interest in licensing HP-UX software. After a period of deliberation, Capellas contacted Fiorina to discuss the potential for a broader strategic relationship based on synergies between the two companies. By June 29, 2001, HP and Compaq had executed a confidentiality agreement, and the companies commenced mutual business due diligence investigations. However, by August 5, the merger negotiations had stalled due, in part, to disagreement over Michael Capellas’s role in the combined company. Compaq called off the talks and the deal remained on hold until late August. ¹³ The discussions resumed when Capellas agreed to accept the role of president and chief operating officer of Newco, reporting to Fiorina. On September 2 and 3, 2001, HP and Compaq executives, along with their respective financial and legal advisors met to negotiate the final terms of the merger agreement. Both boards unanimously approved and executed the merger agreement as of September 4, 2001. During the evening of September 3, 2001, HP and Compaq issued a joint press release announcing the merger agreement.

Prior to merger discussions, HP and Compaq had been focused on growing their enterprise computing and Information Technology (IT) services businesses, two areas in which each company had areas of strength—Compaq was the more significant player in enterprise systems in general—but in which neither company was dominant across the board. By merging, the newly combined company would be a major force in enterprise computing and perhaps within the top three in services. Furthermore, with customers looking to maintain strong relationships with fewer technology vendors, the merger better positioned the combined company to provide their clientele with a wider spectrum of products and services.

In February 2002, HP’s three primary lines of business were: (1) Imaging and Printing, (2) Computing, consisting of desktops, notebooks, servers and storage products, and (3) IT Services. Although the market leader in imaging and printing, HP’s Computing and IT Services businesses noticeably lagged the competition, and the company did not have an organic growth strategy for these businesses. Unlike Compaq, which had moved toward a direct distribution model in response to Dell’s cost competitiveness and now shipped a majority of its PC’s direct, HP shipped only 15 percent of its PC’s direct to customers.¹⁴ To lower costs, HP had recently announced plans to outsource its PC manufacturing operations, although it still acknowledged the need for further cost reductions.

Compaq’s three primary divisions were: (1) Access, consisting of commercial and consumer PCs, (2) Enterprise Computing, which included servers and storage products and (3) Global Services. The company was the market leader in PCs and shipped more units internationally than within the United States. Although direct distribution had helped lower its costs, Access still operated at a negative margin. By merging with HP’s PC business, management believed that positive operating margins could once again be achieved through economies of scale. Compaq was also the market leader in fault-tolerant computing and industry standard servers, where in the former, HP did not have a presence and in the latter, HP’s position was not strong. Conversely, Compaq was not strong in the UNIX market, where HP-UX was a top supplier. On a revenue basis, Compaq was the leading supplier of storage systems in the world, and HP was strong in high-end servers.¹⁵

In combination, the merged company would be a dominant leader in servers and well positioned to exploit the fast growing “storage area networks” trend in the storage market. By combining these complementary server and storage lines, the merged company reduced costs, offered a comprehensive array of products for enterprise customers and could more effectively allocate R&D for growth in its enterprise computing business.

In addition to strategic benefits, the merger would deliver significant financial benefits to shareholders as well. Through both significant cost savings and improved profitability of business lines, substantial earning improvements for shareholders would be realized. By mid-2004, management projected recurring, annual, pretax cost savings of $2.5 billion. Management projected these cost savings to have a value of $5.00 to $9.00 per share, even taking into consideration annual revenue losses of $4.1 billion in 2004 (of total projected 2004 revenue of $92.8 billion) resulting directly from the merger. After realizing anticipated cost savings from synergies, management anticipated a substantial improvement in operating margins beginning in the company’s 2003 fiscal year, in which they projected an overall operating margin of 8 percent to 10 percent. Segment operating margins were anticipated to improve.

On November 6, 2001, Walter B. Hewlett announced his intent to vote against the proposed business combination of Hewlett-Packard and Compaq. In response, HP shares, which were still lower than their announcement day levels, closed up 17.3 percent.

Son of HP co-founder William R. Hewlett and a member of HP’s board of directors, Walter B. Hewlett had attended five of HP’s eight summer 2001 board meetings where the merger was discussed. He also had attended the September 3, 2001, HP board meeting where he joined other board members in voting unanimous support for the merger. However, on November 6 Hewlett said, “After careful deliberation, consultation with my financial advisor and consideration of developments since the announcement of the merger, I have decided to vote against the transaction.”¹⁶

Citing the market’s strong negative reaction to the announcement, Hewlett expressed concerns over diluting HP’s high margin printing and imaging business with Compaq’s low margin, fiercely competitive PC business. “With this transaction, we get what we don’t want, we jeopardize what we already have, and we compromise our ability to get what we need,” said Hewlett.¹⁷

On November 16, 2001, Walter Hewlett filed with the SEC a 71-page report, which detailed his reasons for opposing the merger. In addition to the business portfolio shift away from imaging and printing in favor of PCs, Hewlett’s filing identified three other areas of concern: (1) the merger would not solve HP’s strategic problems, as he believed the company would still be poorly positioned to lead in either enterprise computing or services; (2) the financial impact on shareholders was unattractive, substantiated by the dramatic postannouncement decline in HP’s stock price since the announcement date; and (3) integration risk was substantial, as the two companies were widely believed to have very different cultures and values.¹⁸

Thus began an active campaign by Walter Hewlett for a negative vote on the merger proposal. Over the following months leading to the proxy vote, Hewlett amended his initial information filing with the SEC numerous times by providing hundreds of pages of documentation supporting his claim that the merger rationale was flawed. Hewlett succeeded in creating a public relations battle that sought to sway the opinions of shareholders, analysts, and industry observers. As Hewlett managed to keep the HP-Compaq merger controversy at the forefront of coverage by business news reporters and Wall Street analysts, other high profile dissenters entered the fray.

On December 7, the Packard Foundation, controlling 10 percent of outstanding HP shares and the single largest HP shareholder, decided to oppose the merger. This prompted the following comments from Patrick McGurn of Institutional Shareholder Services, an independent advisory group that analyzes proxies and advises clients on how to vote. “If they lose both families, I can’t see it going through. . . . It’s a real mess now.”¹⁹

While much of Walter Hewlett’s basis for opposing the merger was related to strategic issues, he also claimed that it was just a bad deal financially. Largely discounting the value of synergies, Hewlett contended that HP was paying too much for Compaq and that shareholder value would be destroyed by the merger.

At a time when the NASDAQ had suffered a 30 percent drop during the past 12 months of highly volatile trading activity, markets were still skittish as a result of the September 11, 2001, terrorist attacks and many technology firms were projecting continuing losses for 2002, understanding the value of the HP-Compaq merger was no small undertaking for shareholders. Arguably, the world was a much different place in early 2002 than it had been on September 3, 2001, when the deal was announced, and it was certainly fair to question whether a good deal had been struck. Valuation multiples for comparable companies as well as recent comparable transactions varied widely, due to the uncertain but largely negative outlook for the tech sector, specifically, and the economy overall.

The company was to retain the Hewlett-Packard name, and the HWP ticker symbol would be changed to HPQ. Carly Fiorina, HP’s chairman and CEO, was to maintain those positions in the merged company, and Michael Capellas, Compaq’s chairman and CEO was to be named president of the new HP.The resulting board of directors would have 11 members with a maximum of two employee directors; six directors would come from HP. The merger was described as a tax-free reorganization, in which a Hewlett-Packard subsidiary, Heloise Merger Corporation, was created solely for the purposes of merging with Compaq. This was a reverse triangular merger that would result in a tax-free reorganization in which HP would control Compaq’s assets through a wholly owned subsidiary, thereby limiting HP’s exposure to Compaq’s liabilities.The transaction would be tax-free to Compaq’s shareholders. Although a shareholder vote of the target was required, if necessary, a minority freeze-out could be accomplished. This form of transaction would limit HP’s ability to sell or spin off assets immediately prior to the transaction.

Carly Fiorina and Michael Capellas described the business combination as a merger of equals (MOE), a mutually beneficial marriage of two technology companies each with different strengths and areas of contribution. Whether from euphemism or earnest intent, informed observers could be justifiably dubious of the MOE characterization. In spite of its presumably positive intended consequences, Walter Hewlett took issue with the “merger of equals” and later stated his view to the Council of Institutional Investors:

The MOE described a merger of firms that are approximately equal in size and where a low (or zero) acquisition premium is paid. By indicating that neither party is strongly dominant in the combined company, the term often conveys an attitude of teamwork and cooperation. Although both buyer and target benefit from the realization of synergies that result from the merger, given the lower acquisition premium typically paid, the target’s shareholders are believed to bear more of the cost of an MOE structure. It might facilitate getting a deal done and be beneficial to the buyer’s shareholders in the short term.

By acquiring Compaq with equity, HP would be issuing more than one billion new shares of stock. The merger would likely dilute earnings per share for HP shareholders if full synergies were not realized.

Embarking on the spoiler’s version of a proxy road show, between December 2001, and March 2002, Walter B. Hewlett traveled the country meeting with fund managers, trusts, and other investor groups soliciting their support for a “no” vote on the merger. Hewlett continued utilizing the services of the boutique advisory firms Friedman Fleischer & Lowe and The Parthenon Group to present his analysis supporting a shareholder rejection of the merger. Full-page ads were run in prominent newspapers and business journals, a web site was launched to facilitate the public’s access to information regarding rejection of the merger, and the opposition campaign gained steam. Hewlett had conducted a sophisticated investor relations campaign.

As the March 19 shareholders’ meeting approached, Hewlett continued fanning the flames in the hope of keeping HP embroiled in the contentious proxy vote contest. During late February and early March, Hewlett’s presentations, SEC filing, and press releases described the rich compensation packages Ms. Fiorina and Mr. Capellas would receive if the merger occurred, as well as the results of customer surveys and employee opinion polls, all of which suggested that HP shareholders would be better off without a Compaq merger. Foreseeing a failed merger vote, Hewlett began to suggest that Ms. Fiorina would need to be replaced for the company to move successfully beyond the proxy battle and to pursue a go-it-alone strategy.This elicited a forceful response from HP:

Ever aware of the importance of institutional investors, during a presentation to the Council of Institutional Investors on March 11, 2002, Hewlett summarized his views on the flawed strategy:

In early March, 2002, Institutional Shareholder Services (ISS) was scheduled to deliver its proxy vote recommendation to HP shareholders. Leading up to the ISS announcement, shareholder sentiment had begun to swing against the deal as Hewlett’s vote “no” campaign gained momentum. Led by Fiorina, HP had stepped up its efforts to discredit the antimerger movement by criticizing the Hewlett camp for not having an alternative plan, and personal attacks were exchanged between Fiorina and Hewlett.

Both sides of the HP proxy battle had made presentations to ISS in the hope of influencing the independent advisory group’s decision. As many clients vote according to the ISS recommendation, the odds for merger approval improved with the ISS nod but were still by no means certain.

On March 5 and 6, 2002, ISS recommended that the respective shareholders of both HP and Compaq vote in favor of the merger. There were several key reasons for the ISS endorsement: (1) ISS agreed with management on the strategic and financial outlook for the deal, determining that cost synergies were achievable and revenue losses were realistic; (2) integration efforts made by the two companies had progressed well; and (3) ISS was unable to “confidently embrace”Walter Hewlett’s plan to maintain significant strategic focus on HP’s imaging and printing business.²⁴

Undeterred by the ISS recommendation, Walter Hewlett continued his campaign to defeat the merger and issued a critique of the ISS report, summarized by the following conclusions:

The rift that had developed between Hewlett and the rest of HP’s directors and management characterized the mood of shareholders present at the meeting, as Hewlett received a standing ovation and Fiorina was booed several times. There were even accusations made by Walter Hewlett’s associates that the meeting had gotten off to a late start due to last minute lobbying by HP of Deutsche Asset Management who purportedly had switched their votes at the meeting.

After the vote deadline, HP claimed a “slim but sufficient” margin of victory, but Walter Hewlett, who said the outcome remained “too close to call,” refused to concede defeat until all shareholder votes were tallied. At a news conference, Mr. Hewlett maintained his optimism that the antimerger campaign would prevail but also said that he would like to remain on the HP board, believing that he could “add value to the company.”

By April 17, 2002, more than four weeks since the shareholder vote, HP announced that a preliminary vote tally had confirmed shareholder approval of the merger. On May 1, 2002, HP announced that it had won the election with 51.39 percent of votes cast. The deal was closed May 3, 2002.The newly merged Hewlett-Packard Company began trading under its new HPQ ticker symbol on May 6, 2002.

Walter Hewlett sued HP alleging that HP had obtained votes by “improper means” and that the company had seriously misled investors regarding the progress of its integration plans with Compaq. The court decided in HP’s favor. Thereafter, the company announced that it would not nominate Walter Hewlett as a candidate for its board, based on his “ongoing adversarial relationship with the company.”

By the end of the second quarter after the merger had closed, HP reported cost savings above plan. One year after the merger Fiorina reported that HP had successfully met its targeted cost savings of $3.5 billion. But after three years, HP showed volatile quarterly EPS and operating margins below target. Fiorina noted that the computer industry had endured its worst recession since the merger and that higher volatility was to be expected. In February 2005, Carly Fiorina resigned at the request of HP’s board, who refused to call the merger with Compaq a mistake, and instead cited problems in her execution of the firm’s strategy.

Gyllenhammar himself explained the failure of the merger proposal in behavioral terms: irrationality, Swedish cultural chauvinism, or an envious vendetta against him. In April 1993 the Association of Individual Investors compelled Gyllenhammar to reveal that his compensation was SEK 9.5 million, revealing that he was the highest-paid executive in Scandinavia at a time when Volvo reported losses and was closing plants. CEO compensation is a lightning rod for criticism. Gyllenhammar states that he was opposed by a secret coalition centered on the Wallenberg interests, the only other Swedish industrial group of size and significance comparable to Volvo, which sought to bring an independent Volvo under their influence. Several interviewees, however, discount the significance of this fact. A journalist, Sven-Ivan Sundqvist,²⁸ argues that over time Gyllenhammar had amassed enough enemies in the Swedish business community that he had no base of support with which to confront the opposition.This suggests that the merger failed because of psychology or politics.Yet such an explanation is ultimately unsatisfying, for it sheds little light on the roots of opposition to this deal. For instance, if the merger of Renault and Volvo were to have created shareholder value, it seems doubtful that Gyllenhammar’s opponents would have successfully defeated the proposal.

A counter-assessment, offered by Swedish institutional investors in interviews and by Sundqvist, explains the failure to merge as follows. Volvo’s shares materially underperformed the Swedish stock market over the term of Gyllenhammar’s leadership. Gyllenhammar led the firm into a number of alliances and diversifying acquisitions that failed to deliver the performance improvements investors expected. The strategic alliance with Renault that Gyllenhammar personally crafted was not going well, and institutional investors surmised that otherwise Gyllenhammar would not have advocated merger. In 1993 the merger proposal was a bad deal, presented badly: The control provisions were confusing, and the projected synergies were not justified. Eventually it was learned that the synergies were estimated not by Volvo’s staff, but by outside advisers to Gyllenhammar. Rather than lending credibility, this served to heighten suspicions that Gyllenhammar was manipulating the estimates to serve his own ambitions. Eventually the investors discounted the merger synergies and concluded that the control rights represented an expropriation of Volvo equity value by the French state. From this perspective, the deal failed on its economics.

An internal study by Volvo supports this view. It claims that the golden share and uncertainty about the privatization of Renault were the key drivers of the collapse of the merger proposal. Reflecting on the predicted synergies, the author of the study, Arne Wittlov, said, “People quite simply did not believe in the benefits of co-operation.”²⁹

In the abstract, the synergy benefits seemed reasonable. No interviewee or published source disputes Gyllenhammar’s strategic rationale for the alliance or merger. In an industry characterized by scale economies, the small producer will have a cost disadvantage and therefore an incentive to increase size through alliances and mergers. In other words, the merger did not fail for want of a sound strategic motive. At issue, however, was Gyllenhammar’s credibility in estimating the size of those synergies, and in actually harvesting them.

Compounding Gyllenhammar’s credibility problem was the alteration in control. In essence, the proposed deal would transform the Volvo shareholders from being complete owners of their automotive assets into being minority shareholders in a larger enterprise, where the partner was one of the most interventionist European governments. The French would enjoy 65 percent voting control, a golden share (i.e., a veto over strategic changes in the new firm), discretion over the timing and pace of privatization, and likely sale of a controlling bloc of shares to French corporations.The negative abnormal returns at the release of new information about the terms of merger is consistent with investors’ growing clarity about the value transfer implicit in the French control options, and with their incredulity at the projected synergies. My analysis³⁰ suggests that the control options were worth at least SEK 3.12 billion under conservative assumptions, or 8.3 percent of AB Volvo’s market value of equity just before the merger announcement. This case suggests that control is valuable; CEOs underprice it at their own risk. In his public statements, Gyllenhammar seemed to minimize the importance of the control options in the deal.Yet, if he truly believed in the synergy forecasts that Volvo published, the implied value of the control options would be material. This internal inconsistency supports the claims of Sundqvist and various interviewees that the proposed merger of Volvo and Renault failed in no small part because of doubts about the credibility of its chief advocate.

The importance of these considerations is highlighted in the comparison with the HP/Compaq merger contest.Table 9.1 summarizes the main differences in the two cases. First, we see a remarkable difference in the key advocates for the deals. Gyllenhammar was a distant leader, removed from both employees and investors, a visionary of the integrated Europe, arrogant, and in the view of some, “imperial.” Fiorina was an aggressive communicator, eager to take her case for the merger to investors and employees. A saleswoman by experience, she could read the customer and handle objections. No less a visionary than Gyllenhammar, she conveyed a sense of urgency about the need for transformation. As a result of their differing leadership styles, Gyllenhammar and Fiorina led very different campaigns for votes. Gyllenhammar offered a prospectus and consultants’ reports, preferring to let the deal speak for itself. Fiorina conducted an active campaign, personally contacting all major shareholders and leading a large coordinated effort of the senior executives of HP.

The differences in communication and leadership led to very different perceptions about the benefits of merger. The credibility of synergies was challenged in both mergers, but Fiorina was successful in persuading major investors that the savings could be realized. Gyllenhammar, on the other hand, hindered by a legacy of financial underperformance and previous deals that had fizzled, failed to make a credible case for the savings. As a result, the Volvo shareholders became wary of the implications of the deal for liquidity and control.

Finally, the two deals presented very different value propositions to investors. Volvo’s deal meant marriage to a French state-owned enterprise, anathema to a private investor. The deal offered Volvo’s investors illiquid shares in a firm about which the French government had made vague promises to privatize and in which the government held perpetual rights to intervene in major business decisions. The control options represented material transfers of value from the Volvo shareholders to France. In contrast, the HP/Compaq deal was straightforward: relatively little change in liquidity and control with which to distract shareholders from the value of synergies or the strategic motives of the deal.