Shareholder Measures Hit HP’s Desktop

On severance, Hewlett-Packard shareholders seem to have the last word. Also: Lehman announces big acquisition; Lehman also hurts cash flow with stock buybacks; Apple co-founder's startup finally spotted; and more.


For a while, it seemed as if Carly Fiorina had proved everybody wrong.

The CEO of Palo Alto, California-based Hewlett-Packard had vanquished opponents of her $19 billion purchase of Compaq Computer, a deal she helped strike a week before the September 11 attacks and only a short while before Enron, WorldCom, and other corporate scandals began wrecking investor confidence. And she had apparently mollified most of the company’s old guard — including Walter Hewlett and David Woodley Packard, sons of HP’s founders, who had crusaded against the deal after it was announced — by producing economies of scale that trimmed $3 billion of expenses the first year, and by weathering stock volatility, war, and a consolidation of the tech industry.

But her internal corporate victories haven’t quieted the shareholders at the gates.

When Michael Capellas, HP’s president and former CEO of Compaq, left abruptly in November to head up WorldCom (of all companies), he received a $26 million severance package for his troubles. And not surprisingly, the many enemies Fiorina had made during the Compaq fracas — and among the 17,900 employees laid off by the company during the economic downturn — saw Capellas’s severance as a betrayal.

The pay bonanza took place in a year when HP plunged into the red, swinging from a profit in 2001 to a $903 million loss in 2002. To rub salt into the wounds, it had been widely reported that Capellas would help bring reality to Fiorina’s vision for HP, by acting as an experienced second-in-command and seeing the Compaq integration through.

The hefty payout prompted some grousing from one major shareholder, Service Employees International Union AFL-CIO, which argued that the sweet terms gave Capellas an incentive to split after the merger. The SEIU, which owned 44,000 shares of HP, drafted a proposal that aimed to restrict future severance payouts.

At a regular meeting in early April, shareholders managed to win narrow approval on two nonbinding measures, opposed by management, that urged Hewlett-Packard’s board not to approve major severance packages and poison-pill provisions without shareholder approval. The vote on the former was unusually close; according to, HP announced the results of its other shareowner proposals at the meeting, but the company took two more days to tabulate the results for the severance measure.

Now, more than three months after a chastened HP management promised to “duly consider” adopting the shareholder measures, the other shoe has dropped. The company’s board of directors has announced that they are implementing new policies restricting their ability to grant severance packages and to defend themselves against hostile takeovers.

Under the new severance policy, HP will seek shareholder approval for future severance agreements, if any, with senior executive officers that provide specified benefits in an amount exceeding 2.99 times the sum of an executive’s base salary plus bonus.

The company also announced that the board would submit any poison pill vote a vote unless the board, “exercising its fiduciary duties under Delaware law, determines that such a submission would not be in the interests of the shareholders.”

Lehman, Part I: Firm Announces $2.63 Billion Acquisition

Lehman Brothers Holdings Inc., the fourth-biggest securities firm by capital, agreed to buy asset manager Neuberger Berman Inc. for $2.63 billion so it could compete with bigger rivals in managing money for wealthy clients.

Lehman is paying $41.48 a share in cash and shares for Neuberger, in what would be its biggest purchase. Jeffrey Lane, currently Neuberger’s chief executive, will become a Lehman vice chairman, according to wire service reports. The purchase of Neuberger, which oversees $56.3 billion and serves individuals with more than $500,000 to invest, would help Lehman expand beyond bond trading and underwriting, businesses that accounted for 63 percent of second-quarter revenue. Lehman said it expects the acquisition to lift revenue from its client services business from 13 percent of total revenue to 21 percent.

“This acquisition meets our objectives of enhancing business diversification and growing our higher-margin businesses,” said Richard Fuld, Lehman’s chief executive officer, in a statement. The purchase is expected to close between September and November.

Lehman, Part II: Firm Hurts Cash Flow with Buybacks of Restricted Stock

Lehman Brothers may be flying high in the M&A arena, but it could have had a lot more cash on hand for dividends, acquisitions, or reinvestments in the company had it not been so liberal with restricted stock, according to a report by Salomon Smith Barney analyst Guy Moszkowski, cited in the New York Post.

In 2002, according to the report, 90 percent of Lehman’s cash flow was eaten up by buybacks, “so the wads of stock it had doled out to employees wouldn’t dilute the stock’s value.” Noted Moszkowski, “Lehman has used stock compensation more aggressively than the other firms in order to pay people well in what’s been a relatively good environment.”

As a consequence, between 2000 and 2002 Lehman used 67 percent of its cash to buy back shares; rival Morgan Stanley used 33 percent and Goldman Sachs, 29 percent.

Lehman, notes the report, has been victimized by its own success. Its share price has risen 66 percent since 2000, and so it has been compelled to buy back issued cheaply at much higher prices.

The true cost to Lehman, according to Moszkowski, would be seen by measuring a key ratio: compensation to net revenue. Calculating the cost of stock-based awards, Lehman’s compensation ratio would have been about 70 percent last year, higher than its reported 51 percent. Goldman’s would have been 61 percent, versus its reported 48 percent; and Morgan Stanley’s would have been 55 percent, up from the 42 percent it reported.

Wozniak’s Startup Located at Last

Apple Computer co-founder Steve Wozniak has announced the management team and a number of product details for his wireless startup, Wheels of Zeus, reports The New York Times. The company has developed a GPS-based tracking technology, named WozNet, whose wireless network uses land-based radio signals and GPS data to keep track of inexpensive wireless tags that can accompany people, pets, or property.

WozNet service will include a set of the tags and a base station that can monitor their location. The wireless tags will generate alerts, notifying the owner by either voice message or email when a child arrives at school, a pet leaves the house, or a car pulls into the neighborhood. WoZ will launch service sometime early in 2004, reports the Times.

Short Takes

  • Planned community developer Newhall Land and Farming Co. said it has agreed to be acquired by homebuilder Lennar Corp. and commercial and residential property owner LNR Property Corp. for $990 million in cash. An entity in which Lennar and LNR each hold 50 percent interests will acquire Newhall, a community planner in Los Angeles County. Newhall Land’s unit holders will receive $40.50 in cash for each of their partnership units.

    The companies expect to close the transaction by the middle of 2004. Newhall’s primary activities are planning the communities of Valencia and Newhall Ranch, California, some of the nation’s most valuable landholdings. They’re located on Newhall’s 36,000 acres, 30 miles north of downtown Los Angeles.

  • SSA Global Technologies, a Chicago-based ERP provider, has completed its acquisition of Baan, a provider of software and services to manufacturers in the sectors of industrial machinery and equipment, electronics, aerospace and defense, and automotive. Baan has become a wholly owned subsidiary of SSA GT, which now claims more than 16,500 customers and nearly $610 million in combined revenue, of which $160 million represents license fees for the combined products.

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