Carly's Last Stand?

As Hewlett-Packard Co. (HWP ) Chief Executive Carleton S. Fiorina prepared HP's purchase of Compaq Computer Corp. (CPQ ) last summer, there were already red flags flying. In late July, when HP hired Goldman, Sachs & Co. to finalize the deal, the investment bankers' initial feedback was, "Are you sure you want to do this?" Goldman warned the stock would take a 10% to 15% hit right off the bat because of the massive risk of merging two $40 billion behemoths with such a big stake in the hardscrabble PC business. Then, on Sept. 2, two days before the deal was announced, Fiorina had to tweak her presentation to investors after a Goldman stock analyst warned that her pitch was too optimistic. And all the while, Fiorina knew that board member Walter B. Hewlett, the son of HP co-founder William R. Hewlett, might vote the 5.2% stake he controlled against the merger if Wall Street pounded the deal mercilessly.

The flags didn't fib. The merger news sent HP's stock skidding down 38% over the next two weeks, and Hewlett was true to his word. On Nov. 6, he gave Fiorina only a 30-minute warning before announcing he would vote his shares against the deal. That set in motion a bizarre tug-of-war, as Hewlett and Fiorina both hit the road to convince investors they knew what was best for the Silicon Valley icon. Each claimed they were making headway. Indeed, as late as Dec. 6, HP execs were chipper, saying the report being prepared for the David & Lucile Packard Foundation, HP's largest shareholder, with a 10.4% stake, was positive on how the merger would be executed. But on Dec. 7, Fiorina was dealt a body blow. The Packard foundation said it would oppose the deal, uniting the HP heirs against the merger.