The Case Against the HP/Compaq Merger

February 26, 2002

This presentation was prepared for and on behalf of the Trustees of the William R. Hewlett Revocable Trust as soliciting material. The Trustees advisors have been retained as independent contractors to the Trustees and have no fiduciary, agency or other relationship to the Trustees, the Trust or to any other party, all of which are hereby expressly disclaimed. Therefore, no obligation or responsibility is assumed to any person with respect to this presentation. This presentation does not purport to be a complete description of the views of or analyses performed by the Trustees or its advisors. Except as otherwise noted herein, this presentation and the views expressed herein, as well as any estimates herein, are based on publicly available information and on consultants and industry reports as well as on the views of certain consultants retained in connection with the consideration of the proposed merger by the Trustees. This presentation and the views expressed herein assume and rely upon the accuracy and completeness of all such publicly available information, reports and views and no responsibility for independent verification of any of the foregoing has been taken. All views and estimates expressed herein are based on economic and market conditions and other circumstances as they exist and can be evaluated as of February 15, 2002 unless otherwise noted. The views expressed in this presentation are judgments, which are subjective in nature and in certain cases forward-looking in nature. This presentation also contains estimates made without the benefit of actual measurement. Forward-looking statements and estimates by their nature involve risks, uncertainties and assumptions. Forward-looking statements and estimates are inherently speculative in nature and are not guarantees of actual measurements or of future developments. Actual measurements and future developments may and should be expected to differ materially from those expressed or implied by estimates and forward-looking statements. We do not assume any obligation and do not intend to update these forward-looking statements. The information contained in this presentation does not purport to be an appraisal of any business or business unit or to necessarily reflect the prices at which any business or business unit or any securities actually may be bought or sold. In addition, where quotations have been used herein, permission to use quotations was neither sought nor obtained. This presentation and the views expressed herein do not constitute a recommendation by Friedman Fleischer & Lowe or The Parthenon Group to any holder of shares of Hewlett-Packard or Compaq with respect to how such stockholder should vote with respect to the proposed merger and should not be relied upon by any holder as such a recommendation.

The Case Against the HP/Compaq Merger

Section 1 Section 2 Section 3 Section 4

Why the Proposed Merger is Unattractive HP Must Pursue a Focus and Execute Strategy The Burden of Proof Rests with the Proponents of Large Mergers Next Steps

The Case Against the HP/Compaq Merger

The Proposed Merger is Unattractive to HP Stockholders

1. Financial Impact on HP 1. Financial Impact on HP Stockholders is Unattractive Stockholders is Unattractive

2. Portfolio Shift is 2. Portfolio Shift is Unattractive Unattractive

3. Integration Risk is 3. Integration Risk is Substantial Substantial

4. Acquisition Will Not 4. Acquisition Will Not Solve HPs Strategic Solve HPs Strategic Problems Problems

Market Reaction
Indexed Stock Price Performance
The market has made its view of the transaction clear on two separate occasions: 1) when the deal was announced, and 2) when the Hewlett Foundation and William R. Hewlett Revocable Trust announced their opposition to the deal
140% 130% 120%
9/3/01: HP/Compaq Merger Announced. HP share price drops 19% the day after announcement.

Financial Financial Evaluation Evaluation

8/31/01-2/15/02

Indexed Value vs. 8/31/01

110% 100% 90% 80% 70%

Comparable Company 5% Index1

HP
11/6/01: Walter Hewlett Announces Opposition. HP share price rises 17% on the day of the announcement.

(12%)

60% 8/31/01 9/14/01 9/28/01 10/12/01 10/26/01 11/9/01 11/23/01 12/7/01 12/21/01 1/4/02

1/18/02

2/1/02

2/15/02
5

Note: Stock data through 2/15/02 1 This index is comprised of companies used by Goldman Sachs in performing its Selected Companies Analysis in connection with rendering its fairness opinion to HP relating to HPs proposed merger with Compaq and includes Apple, Accenture, Computer Sciences, Dell, EDS, EMC, Gateway, IBM, KPMG Consulting, Network Appliance, Sun. Index is weighted by shares outstanding.

HPs Earnings Multiple has Contracted Post Announcement

CY 2002E P/E
Announcement HP Comparable Company Index2 20.3x 24.1x Today1 17.7x 26.7x Percent Change (12.8%) 10.8%

Financial Financial Evaluation Evaluation

CY 2002E P/E Based on Acquisition Price

Announcement Today1 Percent Change

Compaq

22.2x

47.7x

114.9%

As of 2/15/02 The index of comparable companies is comprised of the same companies used by Goldman Sachs in performing its Selected Companies Analysis in connection with rendering its fairness opinion to HP on its proposed merger with Compaq, excluding EMC, Gateway, Sun Microsystems, and Network Appliance because their price-earnings ratios were not meaningful as of February 15, 2002. Source: FactSet, First Call.
1 2

Indexed CY2002 EPS Estimates

Comparable Company Index1 110% 100
Indexed First Call EPS Estimates

Financial Financial Evaluation Evaluation

HWP

CPQ

HWP 0.7% CCI (9.9%)

90 80 70 60 50 40 30 20 10 0 8/31/01 9/14/01 9/28/01 10/12/01 10/26/01 11/9/01 11/23/01 12/7/01 12/21/01 1/4/02 1/18/02 2/1/02 2/15/02
Compaq lowers revenue and EPS estimates for Q3 CY2001

CPQ (59.1%)

The Goldman Sachs Comparable Index is comprised of companies used by Goldman Sachs in performing its Selected Companies Analysis in connection with rendering its fairness opinion to HP relating to HPs proposed merger with Compaq and includes Apple Computer, Accenture, Computer Sciences Corporation, Dell, Electronic Data Systems, EMC, Gateway, IBM, KPMG Consulting, Network Appliance and Sun Microsystems, weighted by market capitalization. Source: FactSet, First Call.
1

HP Compaq

Relative Performance
Revenue Growth (CY1999-CY2001)
23.6% 11.1% 8.9% 10.0% (7.7%) HP

Financial Financial Evaluation Evaluation

30%
Year-on-Year Revenue Growth

35% 30% 25% 20%

(20.5%) Compaq
29.6%

Gross Margin (CY1998-CY2001)

29.6% 27.9% 26.0% HP 23.1% 22.7% 23.5% 21.2% Compaq

20% 10% 0% -10% -20% -30% 1999 2000 2001

Gross Margin

15% 1998 1999 2000 2001

8% 6%
R&D/Revenue
6.0% 4.3%

R&D/Revenue (CY1998-CY2001)
5.7% 4.3% 5.5% 6.0%

20%
SG&A/Revenue
HP

SG&A/Revenue (CY1998-CY2001)

18% 15% 13% 10%

16.0%

Compaq

16.5% 14.6% 15.2%

16.1% 15.9% 14.3%

4% 2% 0% 1998

3.5%

3.9% Compaq

14.9%

HP

1999

2000

2001

1998

1999

2000

2001
8

Note:

Historical data from FY 2001 10-Ks and quarterly earnings releases.

HP Compaq

Relative Performance
Operating Income Margin (CY1998-CY2001)
8.6% 8.7% 7.9%

Financial Financial Evaluation Evaluation

10%
Operating Income Margin

10%
Net Income Margin

Net Income Margin (CY1998-CY2001)

7.3% 6.6%

8% 6% 4% 2% 0% 1998 1999

8% 6% 4%

6.9%

5.8% 2.8% 1.9%

3.8% HP

3.1% 2.2% 4.0% 1.1% 0.8%

HP Compaq

1.4%

2% 0%

Compaq

2000

2001

1998

1999

2000

2001

15%
11.8%

Return on Assets (CY1998-CY2001)

11.7% 11.3%

25%
Return on Equity

Return on Equity (CY1998-CY2001)

21.6% 19.7%

22.5%

20% 15% 10%

Return on Assets

10%
9.9% 5.2% HP 2.7%

14.1% 9.9% HP 6.0%

5%

3.7%

Compaq 2.0%

5% 0%

2.9%

2.3%

Compaq

0% 1998 1999 2000 2001

1998

1999

2000

2001
9

Note:

Historical data from FY 2001 10-Ks and quarterly earnings releases.

The Price for Compaq is Unprecedented

HP Claim: Most [tech mergers] were done in hot markets at hot prices This is a deal that was not done in a hot market and a hot price. We got wonderful value, we think.1 Fact: HP stockholders are paying 47.7x earnings for Compaq, more than twice what other hardware/systems acquirors have paid historically
50x
47.7x

Financial Financial Evaluation Evaluation

40x
P/E Ratio

30x
20.5x 17.7x 12.9x

25.4x

20x

17.8x

18.9x Mean Forward P/E multiple in prior transactions

10x

0x
HP/Apollo AT &T /NCR Gateway/Advanced Logic Research Compaq/T andem Compaq/DEC

HP/Compaq 2

Apri1 1989
1 2

December 1990

June 1997

June 1997

January 1998

September 2001 10

Carly Fiorina speaking on CNBC Squawk Box 2/7/02 HP/Compaq multiple paid is based on Compaq FY02 EPS estimate from First Call and HP price as of February 15, 2002, based on deal ratio of 0.6325 HWP shares for each share of CPQ. Historical forward P/E ratios are based on terms of the deal as per company filings at time of announcement and target First Call EPS estimates for the next fiscal year on the day prior to the announcement of the deal.

Earnings Dilution is Unacceptable

Financial Financial Evaluation Evaluation

Under the terms of the proposed merger, HP would issue shares to Compaq at a valuation of 47.7x1 CY2002 earnings vs. HPs multiple of 17.7x2 Before synergies and revenue losses, this results in substantial earnings dilution:
CY 2002 HP First Call3 EPS Dilution4 Dilution $1.15 ($0.26) 22.4% CY 2003 $1.38 ($0.21) 15.6% CY 2004 $1.53 ($0.23) 15.1%

At HPs current earnings multiple, this dilution equates to a negative per share impact of $4.56. ($7.55 including the decline in HPs earnings multiple since the announcement of the merger from 20.3x to 17.7x) The massive dilution to HP stockholders is due to the dramatic downward revision in Compaqs projected earnings while the acquisition price has remained fixed.
Compaqs Revised Earnings Outlook FY2001 At Announcement $0.36
5

FY2002 FY2003 $0.66 $0.88 $0.27 $0.49 (59.1%) (44.3%)

11

Actual/Current3 Percent Change

1 2

$0.15 (58.3%)

Based on HPs closing share price of $20.36 on February 15, 2002, and the announced exchange ratio of 0.6325 and Compaqs First Call consensus EPS estimate of $0.27 for calendar year 2002. Based on HPs First Call consensus earnings estimate of $1.15 for calendar year 2002 and closing share price of $20.36 as of February 15, 2002. 3 Based on First Call estimates as of February 15, 2002 4 Based on pro forma combined EPS calculated based on standalone First Call estimates and excluding the impact of revenue losses and cost savings. 5 Based on First Call estimates as of August 31, 2001

Issue of Fairness?
Compaq
Contribution Goldman Sachs 1 Fairness Opinion CY2002 Revenue CY2001 Net Income CY2002 Net Income Pro Forma Ownership 45% 32% 34% 36% 2/15/02 41% 13% 17% 36%
2

Financial Financial Evaluation Evaluation

Hewlett-Packard
Contribution Goldman Sachs 1 Fairness Opinion 56% 68% 67% 64% 2/15/02 59% 87% 83% 64%
2

Goldman Sachs Fairness Opinion Offer Price/Share Price CY2002 P/E Ratio CY2001 EPS CY2002 EPS
3 1

Goldman Sachs 2/15/02 Valuation $12.88 47.7x $0.15 $0.27

4

Fairness Opinion $23.21 20.4x $0.64 $1.14

2/15/02 Valuation $20.36 17.7x $0.89 $1.15

$14.68 22.6x $0.35 $0.65

1 2 3 4

As per Goldman Sachs Fairness Opinion dated August 31, 2001, from HP's S-4 as filed with the SEC on February 5, 2002. As per First Call, as of February 25, 2002. Net Income is calculated by multiplying EPS estimate by current shares outstanding. Offer Price based upon announced exchange ratio of 0.6325 shares of HP for each share of Compaq. Based upon prices as of 2/15/02.

12

We Believe Managements Assumptions Are Unrealistic

Magnitude of Lost Revenue Contribution Margin on Lost Revenue

Financial Financial Evaluation Evaluation

4.9% Revenue Loss Assumption 4.9% Revenue Loss Assumption Is Too Low Is Too Low

12% Contribution Margin 12% Contribution Margin Assumption on Lost Sales Assumption on Lost Sales is Too Low is Too Low

Revenue loss Revenue loss will not be will not be limited to PCs limited to PCs and Enterprise and Enterprise

Analysts predict Analysts predict much higher much higher revenue loss revenue loss

Precedent Precedent transactions transactions have shown have shown greater revenue greater revenue deterioration deterioration

HPs HPs contribution contribution margin is margin is inconsistent with inconsistent with experience of experience of technology technology companies companies

HP assumes no HP assumes no loss in higher loss in higher margin services margin services and mid and and mid and high-end high-end enterprise enterprise products products

HP assumes no HP assumes no fixed costs in fixed costs in Cost of Goods Cost of Goods Sold (COGS) Sold (COGS)

After $2.5B in After $2.5B in cost reductions, cost reductions, there will be there will be little room for little room for further further operating cost operating cost reductions reductions

10%-12% Revenue Loss More Likely

25% Contribution Margin on Lost Revenue is More Likely

13
Note: For detail, see analysis presented on p. 21-26 of Walter Hewlett Filing HP is Misleading Stockholders: Financial Analysis Illustrates that Compaq Merger Destroys Shareholder Value, 1/23/02

The NPV of the Proposed Merger is Negative

Financial Financial Evaluation Evaluation

In the realistic case, we believe the value of the deal is negative $4 to $5 per share excluding the impact of a change in P/E multiple Per Share Present Value of the Proposed Merger1
$10

Omitted in HP Analysis

Realistic Assumptions

Present Value Per Current HP Share

$8 $6 $4 $2 $0 ($2) ($4) ($6)

$7.47 ($4.56) ($0.43) $2.48 ($1.14) ($2.01)

($4.03) ($4.70)
HP NPV of Net Cost Savings Per Share2 Successful Integration Realistic Case Downside Case Value of Core Dilution Before Cost Savings3 Cost to Achieve Cost Savings4 Corrected Value Cost Savings using Management Adjustment5 Cost Savings NPV Assumption $2.5B $2.2B $1.9B Contribution Margin Adjustment 6 Revenue Loss Adjustment 7 Net Value Per Share

NA ($4.56) ($4.56)

NA $1.9B $2.9B

12% 25% 35%

4.9% 10% 15%

$2.91 ($4.70) ($14.74)

2 3

6 7

Based on assumptions similar to managements outlined on page 30 of HP Position on Compaq Merger, 12/19/01. Present values, except for core dilution and cost to achieve savings, calculated as of February 19, 2002 based on a 20x forward price-earnings multiple applied to net earnings impact in calendar year 2004. Assumes 26% marginal tax rate Assumes net pre-tax cost savings in calendar year 2004 of $2.0 billion based on $2.5 billion in cost savings and $0.5 billion in lost profit on lost revenues. Lost profit calculation assumes $84.0 billion in revenue in calendar year 2004 before revenue losses, 4.9% revenue loss, 12% contribution margin. Represents the value of the core dilution of the transaction before the realization of cost savings at HPs current 2002 calendar year price-earnings multiple of 17.7x. Calendar 2002 pro forma earnings before cost savings calculated based on First Call consensus earnings estimates of $1.11 and $1.35 for HP for fiscal years 2002 and 2003, respectively, and $0.27 for Compaq for its fiscal 2002. Under managements present value methodology, the core dilution has a value of $3.56 per share based on calendar 2004 earnings estimates. Realistic case based on $1.3 billion restructuring charge established in connection with Compaqs acquisition of DEC in 1998, which also involved approximately 15,000 layoffs, and the $635 million in retention bonuses announced by management in the proposed HP/Compaq merger. In fiscal 2001, HP took a $384MM charge for a restructuring it estimated would result in annual cost savings of approximately $500MM. Downside case based on 50% premium to realistic case (11.4% of transaction value). Compaq/DEC restructuring charge as a percentage of transaction value was 13.5%. Excludes the impact of new employment agreements with Ms. Fiorina and Mr. Capellas. Assumes cash is paid out ratably over the first six months following closing Realistic case based on BofA, Hewlett-Packard: Management Turns up the Heat, 12/19/01 base case of 87.8% of management estimate realized in 2003 ($1.8 billion assumed vs. management estimates of $2.1 billion). Downside based on BofA downside case 75.6% of management estimate realized in 2003 ($1.6 billion assumed vs. management estimates of $2.1 billion). Realistic case based on historical experience of tech companies, revenue loss in services, and higher fixed cost assumptions post planned cost synergies. See analysis presented on p. 21-26 of Walter Hewlett Filing HP is Misleading Stockholders. Downside case based on discount to Compaq/DEC transaction. Realistic case assumption based on historical experience of tech companies, revenue loss in services. Downside case based on discount to McKinsey computer company example (see Revenue Loss Benchmarks on p. 11 of Walter Hewlett Filing as amended Why HP is Worth More Than Compaq).

14

Unattractive Pro Forma Business Mix Post Merger

Portfolio Portfolio Impact Impact

Revenues CY2001E

PC / Industry Standard Servers 4%

Enterprise (20%) PC/Access (20%) Imaging & Printing (43%)

PC / Industry Standard Servers 10%

Enterprise Imaging & (25%) Printing (25%)

Services (17%)

PC/Access (30%)

Services (20%)

Hewlett-Packard1 Total = $45B

Combined2 Total = $78B

1 2

Based on actual results from FY 2001 and segment projections from Bernstein research dated 12/18/01. 15 Based on actual results for CY 2001 for Compaq, actual results for FY 2001for HP and segment projections for HP from Bernstein research dated 12/18/01 and segment projections for Compaq from Banc of America research dated 1/17/02.

Integration Risk is Higher

Unprecedented Unprecedented Transaction Transaction
Largest computing merger ever contemplated Huge premium offered (48x for Compaq vs. 18x for HP in CY02 EPS) Global scale and complexity Greater product overlap vs. complement

Integration Integration Risk Risk

Technology Technology Market is Unique Market is Unique

Velocity, complexity, and competitiveness demands focus Successful tech M&A strategy is small deals / rapid integration Product roadmap clarity is critical Consolidation through competitive advantage, not mergers

Management // Management Culture Culture

Power struggle M&A track record Skillset Credibility Bold strokes vs. details Texas vs. Silicon Valley culture Employee opposition

All Comparable All Comparable Deals Failed Deals Failed

Compaq/DEC Compaq/Tandem AT&T/NCR Burroughs/Sperry HP/Apollo

NO LARGE SCALE HIGH-TECH MERGER HAS EVER WORKED EVER The benefits of scale and scope in mature industries, like oil or financial services, can sometimes outweigh the time and energy squandered in the long integration process. But in high technology, no company has ever attempted this trade-off and come out ahead. In fastmoving industries, while the acquirer sorts out its product portfolio and redraws organizational lines, unencumbered rivals seize their chance to race ahead. - Professor David Yoffie, Harvard Business School1
16
1

The Wall Street Journal, December 17, 2001, emphasis added.

The Shifting Strategic Rationale

Then Then
Deal will transform the company and change the technology industry Pace of change is so fast we cant afford to go slowly Customer demands are changing fast

Strategic Strategic Positioning Positioning

Now Now
This is an industrial merger

The industry is mature and consolidating

Customers and competitors are on hold

Compaq brings complementary technology

The businesses overlap, we are not buying new technology Value comes from cost cutting

This is not defensive This is not about cost cutting DEC integration actually worked This merger is fundamentally about leading change and reinventing an industry.1 volumes have been written about the combination, much of it focused on PC market consolidation or creating scale to cut costs. But these stories, frankly, miss the point1
1 2

DEC integration is not relevant This is a merger of like businesses coming together a merger of consolidation not diversificationthis industry is beginning to consolidate, and current technology industry dynamics are much more akin to the mature phases of other industrieslike pharmaceuticals, oil & gas, financial services, telecom and aerospace.2

17

HP 425, 9/25/01, Ms. Fiorinas speech to the European IDC Forum, p. 2 HP 425, 2/4/02, Ms. Fiorinas speech at Goldman Sachs Technology Conference

HP/Compaq is a Flawed Strategy

HP will forever be committed to low-end, commodity hardware manufacturing Profits accrue to technology owners (Microsoft/Intel), not assemblers and marketers Scale will not solve HPs problems in PCs If scale alone mattered, why did Compaq lose its dominant market share to fledgling Dell, and why is it consistently less profitable in PCs than HP?1 End-to-end solutions are an excuse for lack of focus HP needs FOCUS you cant out-Dell, Dell and out-IBM, IBM simultaneously The majority of the market still buys best of breed2 Strategic gaps remain High-end services Software

Strategic Strategic Positioning Positioning

18
In CY2001, Compaq lost $587MM on PC revenue of $15.2B and HP was projected to lose $192MM on PC revenue of $9.1B, see Definitive Proxy filed with the SEC on 2/5/02. 2 Goldman Sachs, Goldman Sachs IT Spending Survey: United States, 2/4/02, pg. 17
1

Worldwide PC Market Growth

Decreasing average selling prices are continuing to put pressure on industry profits
CAGR

Strategic Strategic Positioning Positioning

In the next four years, the PC market is not expected to return to revenue levels previously achieved in 1999

PC Revenues ($B)

(94-01) (01-05) 8% 1%

Annual Average Selling Price Change

$250

6% 4%

5%

$200
$175 $149 $121 $155 $157

$191 $162 $145 $163 $171

2% 0%
Units (MM)
$153

Dollars ($B)

$150
$97

-2% -4% -6% -8%

0%

$100

-6%

-5% -6% -5%

$50

-10% -12%
1995 1996

-10%

-10%

-10%

-10% -12%

1997

1998

1999

2000

2001

2002

2003

2004

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2005

$0

-14%

19
Source: IDC PC Tracker. Annual average selling price calculated by dividing total value by total units sold

PC Industry Wintel Player Profitability

The pie of profits available to all PC manufacturers has decreased significantly since its peak in 2000 Annual Operating Profit from PCs
$25 $0.9 $20 (0.2) $15 $1.1 $8.0 $10 $6.5
Microsoft4

Strategic Strategic Positioning Positioning

Microsoft, Intel, and Dell together accounted for over 100% of the cumulative operating profits in the top 7 players of the Wintel PC industry1 in the years 1998 to 2001.

$0.1 $1.7

$1.8 ($1.4) $8.4 $2.2 $3.4

Other Major Wintel PC ($0.6) Manufacturers2

Dollars ($B)

$1.6 $4.7

Dell3 Intel5

$5 $7.2 $0
Percent of Total Operating Profit
Wintel: 94% Dell: 7% Other Manufacturers: (1%)

$8.8

$10.6

$11.0

$10.8

1998

1999
91% 9% 0%

2000
87% 8% 4%

2001
95% 14% (9%)

2002E
94% 10% (4%)

1 2

Includes Microsoft, Intel, HP, Compaq, Dell, IBM, and Gateway. Compaq: Data includes all PCs, handhelds and workstations. Historical operating profit from Company filings and 1/28/02 Deutsche Bank research. 2002 projections for 1/28/02 Deutsche Bank research. HP: Data includes PCs for 19982000 and PC plus handhelds for 2001-2002. Historical operating profit from 10/2/01 Morgan Stanley research; projected 2002 values are from 2/13/02 Banc of America Securities research. IBM: Historical operating profit from company reports. 2002 projections from 11/1/01 Morgan Stanley research. Gateway: Operating profit from 4/7/00, 7/20/01, and 1/25/02 and Morgan Stanley research. 3 Dell: Operating profit margin for entire company from Dell website and 11/23/98, 10/18/99, 8/11/00, and 1/22/02 Morgan Stanley research. Total company operating profit margin applied to PC only revenue to find operating profit by year. 4 Microsoft: 1998-2001 operating margins for PC-related software and services based on company 10-K filings. Operating margins applied to reported revenue for Desktop applications and platforms. 5 Intel: 1998-2001 operating margins based on Intel Architecture Group operating margins from company filings and 1/15/02 press release. Margins applied to estimated desktop-specific revenue in 10/17/01 CIBC World Markets report. 2002 projection based on overall Intel revenue and operating profit growth from 1/16/02 Morgan Stanley research, applied to current estimated Intel revenue and operating profit in desktops.

20

Disadvantaged Cost Structure

Strategic Strategic Positioning Positioning

Compaqs increased direct distribution capabilities have not narrowed the significant cost structure disadvantage vs. Dell

Percent of Direct Worldwide PC Sales1

100% 90% 80%
Percent of Total Worldwide Sales

PC Operating Expenses2
25%

89%

91%

91%
Dell

92%

92%

20%

20%

Compaq 21%

20% 18%

70%
Channel Channel

50% 40% 30%

Compaq

Percent of Revenue

60%

15%

15% 11% 11% 11%

Dell

12% 10%

10%

20% 10% 0% 1997 1998 1999 5% 4% 6%

15%

21%

5%

0%
2000 2001

1997

1998

1999

2000

2001

21
IDC PC Tracker. 2001 data is latest available data (Q1-Q3 2001) 2 PC/PC server estimate from UBS Warburg research from report Worldwide Demand Tracking February 2002: New PC Economics Does not include services and enterprise businesses.
1

Worldwide Server Market Share

HP has a strong position in Unix and mid-range servers and is well positioned to increase its market share with the Itanium chip
Server Market by Operating System1
$4.3B 100% Dell 80% $16.7B Other
Other

Strategic Strategic Positioning Positioning

Server Market by Price Range2

$3.5B
100% $18.9B Other 80% $9.6B Other

Total = $36.3B

$9.0B

$1.3B

Other

$1.6B Other

$7.8B

Compaq IBM

Other

Other Compaq

IBM

HP IBM

HP

Other
Percent of Total

Sun Sun 60% HP Dell 40% IBM 20% Compaq 0% Entry Mid HP

HP Compaq Sun

Percent of Total

IBM

60% HP Dell

HP

IBM Dell

Dell IBM HP Compaq Compaq

Dell

40%

Sun

Compaq

20%

IBM IBM

Compaq

0%

Unix

Windows

OS/390 Other & OS/400 Linux Netware

High

2001 calendar YTD through 3Q01. Based on 1Q01, 2Q01, 3Q01 Factory Revenues as reported by IDC in Server Tracker database. Other operating systems include IDCs Other category and OpenVMS (Compaq only) 2 Factory Revenue as reported in IDC Server Tracker database for 1st 3 quarters of 2001. Price range categories defined by IDC: Entry is less than $100k; Mid-Range is $100,000-$999,999; High End is $1MM+
1

22

2001 Storage Market Map

$6.3B Other
Hitachi LTD

Strategic Strategic Positioning Positioning

Though Compaq has a large storage business, the majority of its volume is in low-end offerings, while it is a #3 player in the high growth, high margin SAN segment
100% $1.8B Other $6.8B Other
Dell

$2.9B Other HP IBM

$6.4B Other
Fujitsu Fujitsu-Siemens

Total = $24.2B

80%

Dell

HDS

Sun HP Compaq

Percent of Total

60% IBM 40%

Network Appliance

NCR Sun Compaq IBM HDS Fujitsu EMC

NEC

NEC Sun Dell HP

Sun

IBM

20%

EMC

EMC

HP Hitachi LTD

Compaq Compaq

0%

SAN

NAS

DAS

External JBOD

Internal1

External Direct Attached External

Source: IDC 2001E data based on report Worldwide Disk Storage Systems Market Forecast and Analysis, 1999-2005, December, 2001. Internal includes internal JBOD. SAN is Storage Attached Network, NAS is Network Attached Storage, DAS is direct attached storage. Compaq is $20MM in NAS. External Direct Attached is direct attached storage excluding external JBOD and all other internal direct attached storage

23

The Case Against the HP/Compaq Merger

Section 1 Section 2 Section 3 Section 4

Why the Proposed Merger is Unattractive HP Must Pursue a Focus and Execute Strategy The Burden of Proof Rests with the Proponents of Large Mergers Next Steps

24

Focus and Execute Strategy

Background Background Weve learned from fellow stockholders and Wall Street analysts that we share many of the same concerns regarding the proposed merger, and that we also share many of the same priorities for HPs direction HPs strong positions in its core markets provide the basis for a wealth of attractive alternatives to the proposed Compaq merger We believe that HP should pursue a Focus and Execute strategy Make differential investment in Imaging & Printing to protect its position and capitalize on emerging growth opportunities Seriously consider a spin-off of Imaging & Printing within 12 to 18 months Bolster mid-range and high-end enterprise positions by filling key services and software gaps Focus on profitability, not scale, in PCs We believe that due to the dilutive impact of issuing 1 billion shares at 18x earnings to buy Compaq at 48x earnings and the resulting revenue loss, HP can achieve higher EPS with significantly lower margin assumptions and avoid the massive integration risk Under a Focus and Execute strategy, we believe that HP stockholders could achieve greater value with much less risk Potential for $14-$17 incremental value per share improvement relative to a more realistic merger scenario Even under HPs current standalone strategy, consensus analysts estimates for HP suggest $9-$10 incremental value per share relative to a more realistic merger scenario

Strategic Strategic Priorities Priorities

Stockholder Stockholder Value Impact Value Impact

25

Guiding Strategic Principles Focus and Execute

Defend the Franchise and Capitalize on Defend the Franchise and Capitalize on Emerging Growth Opportunities Emerging Growth Opportunities

Imaging & Printing Imaging & Printing

Bolster Mid- and High-End Enterprise Bolster Mid- and High-End Enterprise Position by Filling Key Gaps Position by Filling Key Gaps

Enterprise Enterprise

De-emphasize // Restructure the PC De-emphasize Restructure the PC Business for Profitability Business for Profitability

Access Access

Protect and enhance competitive positions in core inkjet and laser printer hardware and supplies markets Focus R&D to capitalize on opportunities in: Digital cameras/image handling Digital commercial printing Enterprise printing and imaging Multi-function printers Color copying Mobility and wireless printing Profit from expected market growth through leadership position and innovation Eliminate subsidization of other businesses Seriously consider spin-off within 12 to 18 months

Aggressively grow high-end consulting and outsourcing services organically and through targeted add-on acquisitions Focus marketing and R&D on higher margin highend and mid-range segments Leverage strong Unix franchise Leverage strong Itanium position Take market share from Compaq and Sun in Unix Strengthen software offerings to drive higher margin enterprise sales Pursue targeted strategic alliances and acquisitions Rationalize existing software platforms for profitability Focus on profitability, not market share, in NT servers Maintain position sufficient to offer end-toend solutions Explore strategic alliances Compete in Unix, Linux, and NT with value-added services, systems

Focus on profitability, not market share, in PCs Focus the business on more profitable segments, including consumer PCs Explore strategic alliances Explore new access devices where HP brand, technology, and distribution enables attractive margins

26

Summary 2003 Financial Impact

Under a Focus and Execute strategy, HP has the potential to significantly improve profitability
HP Today
(FY 2001) Revenue ($45.2B)
3.7% Annual Revenue Growth 4.2% Margin Improvement Reduce losses in PCs, industry standard servers and software Aggressive services growth Continued cost reductions 2003 market improvement
Services (19%) Imaging & Printing (46%) PC/Access (16%) Enterprise (19%)

HP Tomorrow2
(FY 2003)
(Potential under Focus and Execute strategy)

Revenue ($48.6B)

Services (17%) Imaging & Printing (43%) PC/Access (21%)

Enterprise (19%)

$5.0 $4.0
Billion Dollars

EBIT $1.9B1

$5.0 $4.0

EBIT $4.1B 8.4% Margin3

Enterprise $0.3B Enterprise

$0.4B

PC/Access $0.1B

$3.0 $2.0 $1.0 $0.0 -$1.0

4.2% Margin
Services $0.4B

Billion Dollars

$3.0 $2.0 $1.0 $0.0 -$1.0

Services $0.9B Imaging & Printing $2.7B

Imaging & Printing $2.1B PC/Access ($0.1B) Enterprise ($0.1B)

1 2 3

Based on HP 10/31/01 10-K and Bernstein research dated 12/18/01. Excludes $0.4B in restructuring and acquisition-related charges. Total EBIT includes $0.4Bn in other losses and eliminations. Based on revenue growth and margin assumptions detailed on pages 31 and 32. Historical FY 1998 to FY 2000 average operating income margin was 8.8%. HP reported an overall operating income margin of 6.3% in the first quarter of fiscal 2002. HPs standalone First Call estimate of $1.35, as of February 15, 2002, for fiscal 2003 implies an operating income margin of 6.9% based on a 22% effective tax rate and zero net interest expense and other income. Banc of America Securities projects an operating income margin of 7.4% in fiscal 2003 under managements current strategy and incorporates estimated impact of pre-closing negative revenue synergies.

27

Potential Stockholder Value Impact

We believe that the Focus and Execute strategy results in $14 to $17 greater value per share than a more realistic merger scenario We believe HPs current standalone strategy results in $9 to $10 greater value per share than a more realistic merger scenario We believe a Focus and Execute strategy results in $8 to $10 greater value per share than managements forecast merger scenario
HP Scenarios
Projected Focus and Execute2

HP/Compaq Merger Scenarios

First Call3
Current6
18.3x

More Realistic Case4 Downside8

15.0x

Management Case5 Downside8

15.0x

Current6 Forward P/E Multiple

18.3x

Pre-Deal7
22.1x $36.02

Pre-Deal7
22.1x

Current6
18.3x

Current6
18.3x

$40 $35

$40 $35
$29.83 $29.83

Potential Share Price (FY 2003)1

$30 $25 $20 $15 $10 $5 $0

$30
$26.35

$24.76

$25 $20
$15.88 $19.42

$21.60

$24.76 First Call Implied Price9

$15 $10 $5 $0

FY2003E EPS
1 2 3 4 5 6 7

$1.63

$1.35

$1.06

$1.44

8 9

Estimated potential share price in fiscal 2003. Prior presentations of the value impact of the proposed merger excluded the impact of potential multiple compression. This analysis excludes the impact of the costs to achieve potential cost savings. Based on assumptions detailed on pages 31 and 32 Based on First Call consensus estimate as of February 15, 2002 based on companys existing strategy. Based on consensus earnings estimates for HP and Compaq of $1.35 and $0.45, respectively, for HPs fiscal 2003, $1.8 billion in pre-tax cost savings, 10% revenue loss, 25% contribution margin, and 26% effective tax rate. Management assumption based on 425 filing of 12/19/01. Based on current First Call consensus estimate of $1.11 for fiscal 2002 and closing share price of $20.36, as of February 15, 2002. Based on HP First Call fiscal 2002 EPS estimate of $1.05 and HPs closing share price of $23.21 on August 31, 2001. The weighted average price-earnings multiple of an index of comparable companies increased from 21.6x to 26.4x from August 31, 2001 to February 15, 2002. The index of comparable companies is comprised of the same companies used by Goldman Sachs in performing its Selected Companies Analysis in connection with rendering its fairness opinion to HP on its proposed merger with Compaq, excluding EMC, Gateway, Sun Microsystems, and Network Appliance because their price-earnings ratios were not meaningful as of February 15, 2002. Based on lowest end of price-earnings multiple range used in December 19, 2001, HP Position on Compaq Merger presentation, page 29. Based on HPs current fiscal 2002 price-earnings multiple of 18.3x applied to HPs current First Call consensus earnings estimate of $1.35 for fiscal 2003.

28

Potential Multiple Compression

We believe that merged HP/Compaq would trade at a discount to HP given the new entitys lower returns on equity, lower revenue growth, higher beta, lower credit rating1, and less predictable earninings2
Historical Price-Earnings Multiple
20.0
17.9x 16.1x Percent
3

Projected Return on Equity

20% 15% 10% 5% 0%
8.7% 18.1% 16.5%

17.5
P/E

15.0 12.5 10.0 HP Compaq

6

HP

HP/Compaq 4 More Realistic HP/Compaq 5

7

Historical Beta (Equity Risk)

1.50 1.25
Beta 1.18 1.46

Projected Revenue Growth

6% 5%
Percent 4.7%

4% 3% 2% 1% 0%
2.3%

1.00 0.75 0.50 HP Compaq

HP

Compaq

1 2 3 4 5 6 7

On 9/5/01, Moodys downgraded HP from Aa3 to A2, and placed Compaq under review for possible upgrade from Baa2. S&P placed ratings watch on HP with negative implications and on Compaq with positive implications on 9/4/01. Compaq missed its 2000 and 2001 earnings forecasts at the beginning of each year by 11.0% and 87.3% whereas HP missed by 1.1% and 63.5% for the same periods. Based on average next twelve months price earnings multiple from StockVal data from 10/25/91 to 8/31/01. Based on management projections contained in 425 filing dated 12/19/01. Based on realistic case pro forma EPS (see page 31 and 32 for detailed assumptions) excluding pro forma amortization of intangibles. Based on monthly Barra predicted beta from 12/92 to 9/01. Based on First Call revenue estimates for each companys fiscal 2003 as of 2/15/02.

29

Focus and Execute Strategy Has a Solid Basis

Credible Sources Used Credible Sources Used Wall Street Analysts Agree Wall Street Analysts Agree Consistent with Consistent with Management Strategy Prior Management Strategy Prior to Merger Announcement to Merger Announcement
We are committed to aggressively growing our consulting capabilities, organically and possibly by acquisition HP 8-K, 11/13/00 On the PwC acquisition, we believe the strategic logic underlying acquisition is compelling. HP 8-K, 11/13/00 Board contemplated a 3-way spin-off of Agilent and Imaging & Printing and the company business but put decision on hold, primarily due to the complexity of a 3-way spin-off, not due to lack of strategic merit

Revenue and Margin Growth Hewlett believes HP should adopt a focus and execute assumptions are based on: strategywe tend to agree w/ Hewletts points and continue to oppose the proposed transaction. Management projected growth estimates for individual Prudential Financial, 2/19/02 businesses HP could certainly create stockholder value through IDC market estimates that are improved execution or corporate restructuring. widely used in the industry Merrill Lynch, 1/28/02 Historical margins from actual (Our suggested course of action for HP should the deal HP results fall through would be to)focus on what it does really Equity research (Bank of well (printing and imaging) and scale back or exit from those businesses where it has less of a competitive America, Bernstein) advantage and where its involvement may actually detract from its printer business. Bear Stearns, 12/14/01 better-than-executed results together with continued execution issues at Compaq buttress the idea that HP is fine on its ownWe feel that HP should explore this (Printing and Imaging) value carve-out rather than increase its exposure to the value-destructing segment for the company. A.G. Edwards, 11/16/01 Both sides of the proxy fight "have valid arguments and credible assumptions. One is a broader vision of a global IT powerhouse to compete with IBM, and the other a vision of a more focused competitor in specific segments where you already have a compelling advantage," Joel Wagonfeld, Banc of America Securities, SF Chronicle 2/20/02

30

Revenue Growth Assumptions

Relative to HP management and expected market growth, we assume modest incremental Imaging & Printing and Services growth and slower growth in other segments
10%
Annual Growth (%) 10.0%

Imaging & Printing

8.9% 6.0% Annual Growth (%) 8.0%

10% 8% 6% 4% 2% 0%

10.0%

Enterprise
6.8% 7.3% 5.5%

8% 6% 4% 2% 0%
Mgmt Long- Mgmt Combined IDC Market Term Market Company Segment Growth Est. Growth Est.1 Growth Est. 2001-20033 2001-20032

Our Assumption for HP Seg. Growth 2001-20034

Mgmt Long- Mgmt Combined IDC Market Term Market Company Segment Growth Est. Growth Est.1 Growth Est. 2001-20035 2001-20032

Our Assumption for HP Seg. Growth 2001-20036

15%
Annual Growth (%)

15.0%

Services
8%
Annual Growth (%) 5.0%

PC/Access
4% 0% -4% -8% -12%
(10.2%)
Mgmt Long- Mgmt Combined IDC Market Term Market Company Segment Growth Est. Growth Est.1 Growth Est. 2001-20039 2001-20032 Our Assumption for HP Seg. Growth 2001-200310

12% 9% 6% 3% 0%
Mgmt Long- Mgmt Combined IDC Market Term Market Company Segment Growth Est. Growth Est.1 Growth Est. 2001-20037 2001-20032 Our Assumption for HP Seg. Growth 2001-20038

7.2%

8.7% 5.8%

(2.0%)

(1.8%)

Management projected long-term growth estimates for the combined company from HP 425 Filing 10/25/01. Management combined company segment growth estimates before revenue losses calculated based on segment operating incomes, segment operating margins and segment revenue losses from HP 425 Filing 12/19/01. Based on weighted average projected growth rates from IDC for the following segments: inkjet hardware (1.8%), monolaser hardware (4.3%), color laser hardware (14.7%), inkjet supplies (11.9%), laser supplies (15.5%), digital cameras (12.5%) and scanners (7.5%). Also includes growth of Multi-Function printers from Lyra research (2.7%). Growth rates weighted by 2001 market sizes of inkjet hardware ($10.1B), monolaser hardware ($9.9B), color laser hardware ($7.0B), inkjet supplies ($13.6B), laser supplies ($14.3B), digital cameras ($6.8B), scanners ($4.5B), and MFPs ($7.7B). 4 Imaging & Printing grown at a premium to management estimated growth rate due to strategic focus on that business. 5 Market growth rate based on average of IDC growth rates for Unix servers (8.4%), NT servers (16.9%), and storage (1.7%), weighted by 2001 segment revenues estimated by Bernstein research dated 12/01, for Unix servers ($3.3B), PC Servers ($1.7B) and storage ($2.6B). 6 Based on 0.5x market growth in NT servers and 1.25x market growth in Unix servers from segment focus. Storage grown at IDC projected rate of 1.7% from 2001 to 2003. 7 Market growth rates based on average for IDC growth rates for outsourcing (12.3%), consulting (11.9%), systems integration (14.2%), and support (6.1%), weighted by segment revenue in outsourcing ($0.5B), consulting ($0.6B), systems integration ($0.8B), and support ($3.9B). 8 Based on average of (i) 1.75x IDC sub-segment growth rates for outsourcing (12.3%), consulting (11.9%), and systems integration (14.2%) (equivalent to addition of 3,600 consultants at $250K per consultant per year) and (ii) Bernstein estimates for HP 2000 to 2001 growth rate in support (6.1%), weighted by segment revenue in outsourcing ($0.5B), consulting ($0.6B), systems integration ($0.8B), and support ($3.9B). Financing ($1.9B) projected with flat growth to 2003. 9 Market growth based on IDC 2001 PC Tracker. 10 Based on HP growth at IDC 2001 PC Tracker segment growth rates for consumer and notebook segments, and assuming a 50% contraction of business desktops based on focus strategy.

31

Margin Assumptions
Under a Focus and Execute strategy, HPs overall margins have the potential to increase from 4.2% in fiscal 2001 to 8.4% in fiscal 2003

Imaging & Printing

16%
Operating Margin
12.6%
14.6%

Enterprise
10%
Operating Margin
12.0%
Management FY 2003 Estimate
1

Management 8 FY 2003 Estimate

9.2%

12% 8% 4% 0%
1998-2000 Average2

10.8%

11%

5% 0%

5.0%

3.9%

(1.4%)

-5% -10%
1998-2000 Average 2 FY 2001

FY 2001 3

15%
Operating Margin

Services

Q1 FY 2002 4 Our Assumption for HP Seg. Margin FY 2003 5

Management 8 FY 2003 Estimate

(8.0%)
3

13.7%

4%
Operating Margin

PC/Access
3.4%

Q1 FY 2002 6 Our Assumption for HP Seg. Margin FY 2003 7

Management 8 FY 2003 Estimate

12% 9% 6% 3% 0%
3.8% 4.7%

10.3%

10.3%

3% 2% 1% 0% -1% -2%
1998-2000 Average 2 FY 2001 3

3.0%

Services $0.8B
0.0%

1.0%

Q1 FY 2002 4,9 Our Assumption for HP Seg. Margin 1 Estimated operating margin target pro forma for the proposed merger. Based on HP 425 Filing dated 10/25/01. FY 2003 10
2 3 4

1998-2000 Average 2

FY 2001 3

(1.5%)

Q1 FY 2002 4 Our Assumption for HP Seg. Margin FY 2003 11

Based on HP 10-K filings, excluding non-recurring and extraordinary items. Based on Bernstein research dated 12/18/01. From HP earnings release dated 2/13/02. 5 Based on midpoint of HP 2001 margin and Banc of America Securities 2003 estimate of 13.4% from 2/4/01. 6 From HP earnings release dated 2/13/02. Management noted that UNIX was profitable. Therefore, losses likely stemming from NT servers, software and storage. 7 Based on Bernstein research 12/18/01 estimates of 12.5% Unix operating margin for 2001. Also based on operating NT servers and storage at breakeven and reducing estimated losses in software business by 50%. 8 Estimated operating margin target pro forma for the proposed merger. Based on HP 425 Filing dated 12/19/01. 9 Includes financing business as reported by HP 2/13/02. 10Based on continued strong performance of services business as reflected in Q1 FY2002 reported numbers. Finance projected at break-even. Management anticipates steady state profitability in Finance of 8% to 10%. 11Based on average of 12/18/01 Bernstein research 2000 and 2001 estimated Access segment operating margins, weighted by segment revenue breakdown, and accounting for 50% reduction in commercial PCs per footnote 10 in prior slide.

32

The Case Against the HP/Compaq Merger

Section 1 Why the Proposed Merger is Unattractive Section 2 HP Must Pursue a Focus and Execute Strategy Section 3 The Burden of Proof Rests with the Proponents of Large Mergers Section 4 Next Steps

33

Key Observations From Precedent Transactions

Integration is extremely challenging in the computing industry Management internally focused on integration while customers technology requirements continue to change at rapid pace Highly competitive tech sales force resist embracing the competition Cultural pride / Not Invented Here Revenue loss is always greater than anticipated Customers migrate to competitors because of product consolidation and product roadmap uncertainty Disruption caused by integration issues, and sales force realignment and consolidation impairs companys ability to respond to customer concerns Business model, not scale, determines success in commodity computing End-to-end solutions is an over-worked strategic rationale used in each transaction Repackaging competitors products, which were already available on the market, does not cause customers to change their buying decisions Customers buy best-of-breed

34

Why Precedent Computer Mergers are Most Relevant

Past computer mergers are more relevant than large general industrial transactions because different industries have fundamental differences, such as: Growth rates Operating margins Product cycles Customer buy-in to product roadmap Competitive dynamics Capital intensity Customer and supplier power Success in high technology hinges on rapid product cycles Tech platform consolidations create far greater customer disruption and customer migration issues than do general industrial mergers, for example, which may result in a change in oil supplier or who sends the phone bill In the fiercely competitive and rapidly changing computing industry, companies cannot afford to get out of step with customers by shifting focus to merger integration issues and cost saving synergy targets
35

Compaq/DEC Value Destruction

Integration Integration Risk Risk

Since the date of the Digital acquisition, Compaq stockholders have lost 82% of their value relative to stockholders of comparable companiesand 2002 forecasted earnings are well below earnings before the acquisition Loss in Value1
$3.00

Compaq EPS Disappointments2

$2.50
$70

$2.43 $2.16

$2.00
$60

Share Value ($)

$50 $40 $30 $20 $10 $0 Share Price as of January 26, 1998

$30.53 105% $29.00 ($48.58) (82%) Down 82%

Dollars

$1.69 $1.50 $1.35

$1.77

$1.00 $0.47 $0.47

$0.97

$10.95

$0.50

$0.49 $0.32 $0.15 $0.27

$0.00
Increase in Value of Loss in Value Relative Index of Comparable to Index Companies Share Price as of February 15, 2002

1997

1998

1999

2000

2001

2002E

2003E

Forecast before DEC

Forecast after DEC

Actual

1 2

Adjusted for share splits and stock dividends. 1998 and 1999 Standalone estimates from First Call, as of January 20, 1998(Forecast before DEC). 1998, 1999 and 2000 Combined estimates from First Call, as of August 1, 1998 (Forecast after DEC). 2002 and 2003 estimates from First Call, as of February 15, 2002. All actuals from First Call. The Comparable Company Index is comprised of companies used by Goldman in performing its Selected Companies Analysis in connection with rendering its fairness opinion to HP relating to HPs proposed merger with Compaq and includes AAPL, ACN, CSC, DELL, EDS, EMC, GTW, IBM, KCIN, NTAP, SUNW, weighted by shares outstanding.

36

Big Deals that Destroyed Shareholder Value

($Billions, unless otherwise noted) Announce Date 4/7/98 6/24/98 12/14/98 5/7/98 6/7/99 4/22/99 9/15/99 11/17/98 9/6/00 9/3/01 Acquiror Conseco Inc AT&T Corp Mattel Inc Daimler Benz AG AlliedSignal Inc AT&T Corp Motorola Inc Rite Aid Corp Citigroup Inc Hewlett-Packard Target Green Tree Financial Tele-Communications Inc The Learning Co Inc Chrysler Corp Honeywell Inc MediaOne Group Inc General Instrument Corp PCS Health Systems Inc Associates First Capital Compaq Acquiror Equity Value $9.2 97.4 8.6 98.6 49.5 180.5 52.6 11.3 246.8 $45.0 Target Equity Value $5.9 52.5 2.9 31.2 14.6 43.5 11.0 1.4 26.4 $25.5 % Target/ Acquiror 64.3% 53.9% 33.4% 31.6% 29.5% 24.1% 20.9% 12.3% 10.7% 56.6% Loss in Acquiror Equity Value Amount
1

Percentage

($6.5) (46.2) (1.6) (51.4) (21.9) (133.8) (31.1) (9.9) (56.3) ?

(71.1%) (47.5%) (18.6%) (52.1%) (44.1%) (74.1%) (59.1%) (87.8%) (22.8%) ?

1 2

Based on acquiror share price decline from announcement to three years following announcement and acquiror shares outstanding at announcement. Based on acquiror share price decline from announcement to three years following announcement.

37

Independent Sources
KPMG11 KPMG
KPMG Consulting Survey More than a third of the biggest international takeovers agreed at the height of the bull market are now being unwound and 32% of the chief executives or finance directors responsible for planning the original deals have now been replaced Two-thirds of the companies bought between 1996 and 1998 still needed to be properly integrated Bernstein Strategy Group Merger Study Research of 7000+ M&A transactions between 1992 and 1999 reveals that acquirors underperform by 5% per annum in the three after the transaction, and 11% in the first two years Deals that were initially not well received by the market underperformed the market over 1, 2 and 3 year periods more dramatically Technology transactions generally fared worse Stock deals are more destructive to returns than cash deals The larger the deal, the greater the odds of failure Learning from High-Tech Deals The bias against big deals is well-founded. Smaller transactions lend themselves to simpler, more disciplined structuring and integration, thereby minimizing the negotiations and infighting that, in larger deals, can defeat the logic of the original plan. On average, gold-standard companies pay less than 1 percent of their market capitalization for an acquisition and that most of their acquisition programs included a few larger transactions, but deals in which the purchase price of the target was 50 percent or more of the acquirers market capitalization were rare
1 2 3

Bernstein22 Bernstein

McKinsey33 McKinsey

Financial Times, 2/22/02. KPMG looked at the 500 largest deals between 96-98. Bernstein research dated October 1999 The McKinsey Quarterly, 2002 Number 1, Learning from High-Tech Deals. ). In early 2001, HP retained McKinsey & Co. to assist in HPs evaluation of strategic alternatives and potential acquisition candidates including Compaq

38

Independent Sources (continued)

McKinsey11 McKinsey
Why Mergers Fail Study of 160 acquisitions between 1995 and 1996 showed that overall acquirors organic growth in revenue lagged industry peers by 4 percentage points concluding that ultimately, its the revenue that determines the outcome of a merger, not costs; whatever the mergers objectives, revenue actually hits the bottom line harder Revenue shortfall is cumulative and compounding: 1% shortfall in revenue growth requires cost savings 25% higher that anticipated 40% of mergers fail to capture the identified cost synergies Of 160 acquirors, only 12 achieved organic growth rates significantly ahead of their peers Merger Integration: Delivering on the Promise Study of 78 transactions from 1997 to 1998 found that 53% failed to meet their objectives, and that the more strategic the rationale for the merger, the greater the likelihood of failure

Booz Allen22 Booz Allen

Journal of Journal of Finance33 Finance

Acquirors in stock-financed mergers had five-year-post-acquisition abnormal returns of negative 25%

2 3

The McKinsey Quarterly, 2001 Number 4, Why Mergers Fail. In early 2001, HP retained McKinsey & Co. to assist in HPs evaluation of strategic alternatives and potential acquisition candidates, including Compaq. Booz-Allen & Hamilton. Merger Integration Delivering on the Promise 2001 Tim Loughran and Anand Vijh, Do Long-Term Shareholders Benefit from Corporate Acquisitions, The Journal of Finance, December 1997

39

Independent Sources (continued)

University of University of Chicago11 Chicago

Study concluded that the harsher the stock market reaction in the days following an announcement, the less likely a deal was to succeed

David Yoffie, David Yoffie, Harvard Harvard Business Business School School Professor22 Professor

No large scale high-tech merger has ever worked ever Today, H-P and Compaq want to make the same mistake. Melding two large and fiercely competitive organizations is a formidable challenge in any industry. The benefits of scale and scope in mature industries, like oil or financial services, can sometimes outweigh the time and energy squandered in the long integration process. But in high technology, no company has ever attempted this trade-off and come out ahead. In fast-moving industries, while the acquirer sorts out its product portfolio and redraws organizational lines, unencumbered rivals seize their chance to race ahead.

Red Herring Red Herring March 2002 March 2002 Issue Issue

In any case, mergers of large computer companies nearly always fail as did Compaqs own merger with Digital Equipment. HPs mergers should aim to acquire technology, not scale.

40
1 2

Study by Steve Kaplan of University of Chicago as cited in Wall Street Journal, 9/10/01 Quoted in The Wall Street Journal, 12/17/01

HP Mistakenly Claims that it has All the Elements of a Successful Merger

Rationale11 Rationale
Achieves market leadership

Reality Reality
Acquiring market share does not translate to leadership, i.e., demonstrated better business model, technology innovation or success at winning business from competitors

Expands current business (does not enter new business)

Admission of no new significant technology/capabilities added to HPs portfolio.1 Significant overlap creates cost synergies which are offset by revenue losses from rationalized products and services

Stock only (providing strong balance sheet)

Large stock transactions statistically more risky Upon announcement of the proposed merger, Moodys downgraded HPs debt rating and put it on negative watch; S&P has also put HP on negative outlook3 Big transactions statistically more risky Bigger, but in an unattractive business, commodity computing. Hardware has diminishing economies of scale and HP and Compaq already have significant scale. HP is doubling its exposure to a volatile business with declining margins, betting on cost savings in 2004 to achieve profitability

Big, with significant cost savings

Smooth and effective integration

Integration planning is not integration. The impact is felt after closing HP has outlined a plan for gradual integration over the next 18-24 months. Remember, this is a lifetime in technology and will be highly disruptive to business

41

1 1

HP 425 Filing, Setting the Record Straight, 1/24/02 S&P placed ratings watch on HP with negative implications and on Compaq with positive implications on 9/4/01.

The Case Against the HP/Compaq Merger

Section 1 Why the Proposed Merger is Unattractive Section 2 HP Must Pursue a Focus and Execute Strategy Section 3 The Burden of Proof Rests with the Proponents of Large Mergers Section 4 Next Steps

42

Next Steps if Merger Voted Down

The board is constrained by the merger agreement The board will listen to stockholders Operating management is stable Appoint Lead Director/Chairman Appoint interim CEO Appoint CEO search committee Nominate additional Directors

43

The Board and Senior Executives are Committed to HP

It is not all or nothing said Richard Hackborn. If HP stockholders vote against the Compaq merger we will do everything possible to explore the next best possible alternative. Hackborn also stated, Nobody is talking about leaving on the board, nor is anyone talking about asking anyone to leave That has got to be taken out of the equation for investors. - Reuters, 2/13/02

If the deal doesnt pass a shareholder vote, Wayman said hell stay on at HewlettPackard and make the best out of the businesses we have. He said he thinks thats true for other managers as well. I have no intention of voluntarily resigning, he said. - Bloomberg, 1/22/02

44

HP Management
HP has a deep bench with an average tenure of 17 years

Name Webb McKinney Robert Wayman Susan Bowick Vyomesh Joshi Pradeep Jotwani Ann Livermore Debra Dunn Duane Zitzner Carly Fiorina Richard DeMillo Iain Morris

Position President, Business Customer Organization Executive VP, Finance & Administration and CFO VP, Corporate Human Resources President, Imaging and Printing Systems President, Consumer Business Organization President, HP Services VP, Strategy & Corporate Operations President, Computing Systems Chairman, CEO, President VP, CTO President, Embedded and Personal Systems Organization

Years with HP 33 years 33 years 25 years 22 years 20 years 20 years 19 years 13 years 2 years 1 years 1 year

Age 56 56 53 47 47 43 45 54 47 55 45

45
Sources: HP 10-K filed 1/29/02, Hoovers Online, HP Website

Interim CEOs Can Provide Stability

Procter & Gamble
Incumbent CEO Durk Jager resigned after a failed attempt to acquire Warner-Lambert and two consecutive missed quarterly forecasts. John Pepper, former Chairman and CEO returned to Chairman position, Alan Lafley was named CEO, President and Director. (June 2000)

Honeywell
Incumbent CEO Bonsignore resigned on the same day that the European Commission rejected the GE/Honeywell deal. Former CEO Lawrence Bossidy came out of retirement to replace him. (July 2001)

Apple
CEO Gil Amelio resigns as CEO after several years of losses. Steve Jobs is appointed Interim CEO. In January 2000, Jobs accepts the permanent CEO position. (June 1999)

Circumstances

Other Management Attrition

None

None

None

Stock Price

Up 30% annualized June 7, 2000 - Present

Up 4% annualized July 2, 2001 - Present

Up 31% annualized July 8, 1997 - Present

46

Source: Company Press releases, press articles and SEC filings.

Examples of CEO Transitions

Company Apple Hyperion IBM Mattel McKesson Palm Safeway

New CEO

Appointment Date 7/9/97 5/3/99 3/26/93 2/3/003 2/27/014 11/7/015 5/1/93

Compound Annual Stock Performance Since CEO Change1 31% 15% 23% 23% 15% 335% 12%

Fred Anderson/Steve Jobs2 Steven Imbler Lou Gerstner Robert Eckert John Hammergren Eric Benhamou Steve Burd

1 2 3 4 5

Compound annual stock stock growth from date of CEO departure until 2/15/02 Interim committee appointed to appoint CEO. In the interim period, Fred Anderson, executive VP and CFO, acted as CEO. Steve Jobs ended up as CEO. Date of Jill Barad departure; Eckert assumed CEO position on 5/17/00 Departure of co-CEO David Mahoney Resignation of Carl Yankowski. Eric Benhamou chosen as interim CEO

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Additional Information
On February 5, 2002, Walter B. Hewlett, Edwin E. van Bronkhorst and the William R. Hewlett Revocable Trust (collectively, the Filing Persons) filed a definitive proxy statement with the Securities and Exchange Commission relating to their opposition to the proposed merger involving Hewlett-Packard Company and Compaq Computer Corporation. The Filing Persons urge stockholders to read their definitive proxy statement because it contains important information. You may obtain a free copy of the Filing Persons definitive proxy statement and other soliciting materials on the Securities and Exchange Commissions website at www.sec.gov, at the Filing Persons website at www.votenohpcompaq.com, or by contacting MacKenzie Partners at 1-800322-2885 or 1-212-929-5500, or by sending an email to proxy@mackenziepartners.com.

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