MERGER: Hewlett-Packard is hoping to get off to a fresh start in 2002 after spending much of the past few months trying to defend what is widely being called the most poorly received merger ever.

Hewlett-Packard chief executive Ms Carly Fiorina has weathered a storm of criticism since September, when the firm launched its $22.1 billion (€24.46 billion) bid for rival Compaq Computer.

But officials say it is Hewlett-Packard's turn to go on the offensive and convince sceptics that buying Compaq is Hewlett-Packard's best shot at becoming a competitor which no one in the computer industry can afford to ignore.

Its enterprise strategy will be central to Hewlett-Packard's sales pitch. Ms Fiorina says it is the "fundamental driver of this merger".

She has long argued the deal is about making Hewlett-Packard a stronger company that can better serve the needs of its enterprise customers on a global basis. But that message has largely been drowned out by voices of dissent, in particular that of Mr Walter Hewlett, board member and son of one of Hewlett-Packard's co- founders.

Critics such as Mr Hewlett have argued that the transaction would dilute Hewlett-Packard's highly profitable printing business by increasing exposure to personal computers - an extremely competitive, low-margin business.

This and other concerns have caused all of the Hewlett and Packard heirs to say they will vote the 18 per cent of Hewlett-Packard shares they control against the transaction, forcing management to win shareholder support.

Hewlett-Packard says that will change as it focuses on hammering home its message to investors and advisers such as Institutional Shareholder Services (ISS), which will issue its recommendation on the deal a few weeks before the stockholder vote.

Hewlett-Packard outlined its sales pitch in a paper released just before Christmas. It also took aim at Mr Hewlett, arguing that his opposition relied on "faulty" assumptions and displayed "a simplistic anti-merger bias".

The paper makes a compelling case for combining the two companies. Hewlett-Packard says the industry is changing rapidly and that enterprises want to do business with vendors capable of providing integrated computing solutions to clients on a global basis.

It argues the enlarged group would be better positioned to fix its unprofitable PC businesses. It would also be the leading provider of industry-standard servers and the second-largest maker of proprietary Unix servers.

Also, the new Hewlett-Packard would capture the lead in the storage market and rank third in the lucrative services business. The combined group would be able to allocate $4 billion annually to internal research and development.

However, customers remain unconvinced that the merger will create a stronger computer supplier, says Ms Debbie Lawson-Kirkwood, director of customer advocacy at Interex, which represents 37,000 Hewlett-Packard users in North America.

The number of corporate customer defections remains an important unknown. The firms estimate they would lose 5 per cent of combined revenues after a merger, though some analysts have suggested sales losses of 15 per cent.

Hewlett-Packard scoffs at such suggestions, but argues that annual synergies of at least $2.5 billion would "overwhelm" even a 15 per cent revenue loss, as lost revenue would mainly be in low-margin sectors such as PCs and servers.

Nonetheless, Hewlett-Packard says it expects to limit sales losses by demonstrating it has a detailed integration plan, with team members and product road maps which will be available to customers one month after the deal closes.

Mr Craig Ellis, an analyst at Salomon Smith Barney, says most customers will be reluctant to change vendors, because switching would entail buying hardware and software not compatible with legacy systems.

Meanwhile, the two firms are awaiting word from Europe's competition regulator, which is conducting a 30-day review. Authorities could extend the probe, which could put off European regulatory approval until late May.

Hewlett-Packard is also waiting for its proxy statement to be approved by US securities regulators, and to be mailed to shareholders, expected within weeks.

It will then launch its formal roadshow to meet ISS and institutional shareholders, a number of which have confidentially pledged their support for the deal, according to Hewlett-Packard. - (Financial Times Service)