HP Employee Fund To Vote Against Compaq Merger

Hewlett-Packard Co. Compaq Computer Corp.

Hewlett-Packard employees with stock in the company's retirement plan opposed the merger by a 2-to-1 margin, with more than 24.7 million of the 34.3 million shares held by the plan to be voted against the deal, sources close to dissident HP director Walter Hewlett said.

Hewlett-Packard declined to confirm the employee numbers, which would appear to undermine months of company-sponsored polls showing support for the deal that is also being watched as a vote of confidence in HP Chief Executive Carly Fiorina.

Aside from the symbolic blow to management, the 24.7 million HP retirement shares represent another 1.27 percent of stock stacking up against the $21 billion plan in a very tight contest marked by deepening acrimony between the two sides.

Around 24 percent of HP stock has been committed against the plan with about 20 percent estimated for it, although HP says most of its top 20 institutional shareholders back management.

The Texas Teachers Retirement Systems also said it would vote 5.9 million shares against the deal, and Evergreen Investments said it was opposing the plan with its 5.9 million shares. Employees of HP spin-off Agilent Technologies Inc. also voted against the plan, Walter Hewlett said in a statement.

"WE REMAIN CONFIDENT"

"Employees hold their shares in a number of ways. This is not a barometer for the total employee vote or how the rest of the shareholders are voting. We remain confident about a favorable outcome," HP spokeswoman Rebeca Robboy said.

Walter Hewlett, an HP founding family scion, wants to focus the company on its printer operation and maintains that the merger would saddle it with a low-margin personal computer operation.

The nasty and expensive merger battle, in which HP has dismissed Hewlett as a dilettante and Hewlett has called for Fiorina's dismissal, looked set to continue beyond Tuesday's shareholder vote, which caps a four-month campaign by both sides to win investor support.

The firm certifying the HP vote, IVS Associates, will not even start counting on Tuesday and with 900,000 shareholders the final tally could take weeks to compile.

Sources on both sides said the vote remained very close, with retail investors, who hold a quarter of shares, split about down the middle.

Institutions hold about 57 percent of HP shares and some major funds have yet to declare their position.

One of the last-minute voters, State Street Global Advisors, declined to say which way it had voted on Monday.

"We listened to both sides up until the very end. I spoke to the principals on both sides this morning. We cast our vote about noon," said the chairman of the Boston-based firm's investment committee, John Serhant, who votes the vast majority of the 2.4 percent of HP stock it holds for clients.

"I am not sufficiently confident that I want to lead the pack. I hope I'm on the right side," he said. "We all believe it is going to be close.'"

JET WAITING

A private jet was standing by on Monday, ready to ferry Walter Hewlett to make any last-minute pitches that could swing the vote, his camp said.

He argues the merger would turn HP into the No. 1 seller of low-tech personal computers rather than enhance its high-end computing and printer businesses, and that HP would lose ground against rivals while trying to integrate 150,000 employees.

Fiorina who has tied her own fate to the deal and never appeared to consider backing down, scheduled calls to investors around meetings on how to carry off the integration.

She says the deal would make HP a technology powerhouse able to serve customers' every need and was necessary because growth was slowing in the technology industry, setting the stage for consolidation.

HP shares rose 1 percent, or 20 cents, to $19.25 and Compaq rose 0.29 percent, or 3 cents, to $10.36, an indication the market had priced in a slightly greater risk that the deal, which would rank as the largest in the computer industry, would not be approved.

BOTH SIDES CONFIDENT

Each side could give an unofficial vote tally after the meeting on Tuesday morning, but the official vote count of ballots from as many as 900,000 shareholders will not emerge for days or weeks.

Sources close to HP believed over the weekend that State Street, for instance, would vote for the deal, but a source on Walter Hewlett's team said the fund had bailed on HP.

"You've got Capital Research, State Street and State Farm, and you don't know how they're going to vote and those are the keys," said Andrew Whittaker, head of arbitrage research at Lehman Brothers, referring to three big funds. He saw a 55 percent chance the deal would be approved.

State Street's Serhant said he had not revealed his intention, not flip-flopped, and that either side could have read a bit too much into his close attention. "They may have mistaken a sincere interest with a direction," he said.

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