HP's Fierce Face-Off

It is hard to remember, standing in Enron's long shadow, that a company in a growth crisis can be as fascinating as one that's just plain in crisis. But Hewlett-Packard is doing its best to remind us. The personalities driving HP's long-running and very public merger debate are larger than life, and the whole of Silicon Valley is riveted by the story. Which, if you haven't been paying attention, goes like this: CEO Carly Fiorina wants a $25 billion marriage with Compaq--the largest tech merger ever--to avoid being squeezed between Dell (the personal-computer giant) and IBM (a leader in tech services and server computers). But certain key shareholders--including the children of HP's garage-dwelling founders and geek-world deities Bill Hewlett and Dave Packard--think the proposed merger is the equivalent of two stumbling drunks trying to prop each other up.

As the merger debate rushes toward a March 19 shareholder vote, both sides have engaged in a nasty nationwide campaign of name calling. Last week Walter Hewlett, Bill Hewlett's son and the HP board member leading the fight against the Compaq merger, released a report on what the company should really be doing. Its main proposal: dump Fiorina. "She's burned a lot of bridges," Hewlett told TIME. "It's hard to see how she would survive." This came after the rest of the board, which backs Fiorina, drafted a blistering open letter to Hewlett: "You have insulted our personal commitment and fiduciary responsibility." Them's fighting words.

You don't see public backbiting like this at every company. Then again, not every company has a legacy like HP's. Both Hewlett and Fiorina have staked their claim to what the founders dubbed "the HP way," a phrase that at first embodied the ideals of innovation and good corporate citizenship but has come to mean many things to many people over the past 60 years. Now two polar-opposite visions of the company's destiny--indeed, of how best to survive in today's rough-and-tumble tech economy--have taken shape. When the smoke clears, there will be only one HP way.

In Fiorina's future, HP follows the mantras of the dotcom era: get big fast and diversify, keeping your fingers in as many pies as possible (in this case, the PC business, the server business, the consultancy business, and printing and imaging). Hewlett's vision is more classic and conservative: avoid spreading your resources too widely, and focus on what you do best--and what you're known for. In HP's case, that's printing and imaging. Hewlett would have HP ditch most of its low-margin PC business. Until recently, Wall Street seemed to be in lockstep with Hewlett. Shares plunged 19% when the proposed merger was announced, then soared 17% late last year when Hewlett came out in opposition to it.

Amid the acrimony, the challenge for investors is to keep an eye on the bottom line. "Personalities make this contest more sexy for public consumption," says Ram Kumar, senior analyst for Institutional Shareholder Services, who has heard the stump speeches of both sides. "We try to confine ourselves to logic." Kumar's rationale counts more than most. Next week the influential ISS will mail a widely awaited report to pension funds and other big holders of HP stock. Because the family foundations opposing the merger control 19% of HP shares, Fiorina needs around two-thirds of institutional investors on her side.