US pension fund to vote against HP-Compaq merger

By Michael Kahn

SAN FRANCISCO: U.S. pension fund giant Calpers said on Friday it will vote against Hewlett-Packard Co.'s $22 billion bid to buy Compaq Computer Corporation, dealing an unexpected blow to HP Chief Executive Carly Fiorina's drive to push through the biggest merger in computer industry history.

The California Public Employees Retirement System, or Calpers, said it opposed the deal in part due to the high premium being paid for Compaq and the risk that competitors would eat into market share while the two firms combine their businesses.

While Calpers holds stakes of less than 1 percent in both companies, the pension fund's moves are closely watched in debt and equity markets and its decision to oppose the merger could sway undecided investors before they vote on March 19.

Analysts called Calpers' move surprising but were split on whether the decision by the nation's largest pension fund would derail the deal. "I don't know that it makes a crucial difference, but it hurts," said Roy Papp, managing partner at L. Roy Papp & Assoc., a Phoenix-based investment firm.

Calpers, which is the largest U.S. pension fund, said it based its decision purely on the financial prospects the merger posed for its own portfolio. "It is important to state this decision is not a referendum on HP's management team or its CEO Carly Fiorina," Calpers said in a statement. "Rather it is solely based on the merits of this transaction as it relates to Calpers portfolio."

Calpers' decision came after Institutional Shareholder Services, an independent institutional investment advisory firm, declared support for the purchase on Tuesday -- a move which emboldened HP's management to claim they had seized momentum in the merger battle.

Some analysts expressed surprise that Calpers, which is an ISS client, had opted to disagree with the influential advisory firm, which was expected to bring about 10 percent or more of HP's investors into the pro-merger camp.

"We won't be influenced by what Calpers does," said Noel DeDora, managing director and senior portfolio manager at Fremont Investment Advisors, which holds stock in both firms. "We will vote the way we think is best."

Still, the pension fund's opposition now looks likely to stoke the ongoing public fight between HP's Fiorina and the heirs of the computer-maker's founding families.

Walter Hewlett, a dissident HP board member and son of a company co-founder, has assembled a roughly 20 percent bloc of votes in his effort to defeat the merger, which he says could destroy one of Silicon Valley's most respected corporations.

Hewlett says Compaq would bloat HP's business with its personal computer division, while HP management says Compaq offers services and technology that would make the combined firm a global powerhouse. A spokesman for Hewlett said Friday the negative vote by the roughly $150-billion retirement fund vindicated his fears.

"We think it is important to note that Calpers pointed specifically to the significant integration risks as well as the strategic uncertainty of the proposed combination in deciding that HP's proposed acquisition of Compaq does not represent the best alternative for value creation," Hewlett's spokesman, Todd Glass, told Reuters.

Hewlett-Packard, which on Wednesday cleared its final regulatory hurdle by obtaining Federal Trade Commission approval for the deal, said it was disappointed in Calpers' decision but predicted the merger would go through. "Calpers is only one shareowner and we believe the good judgment of the rest of our shareowners will prevail and the merger will be approved," said a company spokeswoman.

Hewlett-Packard shareholders are due to vote on the proposed merger on March 19, with Compaq shareholders voting one day later. But Calpers said integration risks such as combining the firm's massive payrolls doomed the deal as far as the pension fund was concerned, making the merger too much of a financial gamble.

Pat Macht, a pension fund spokeswoman, added that even though Calpers owned 7.6 million HP shares and 6.5 million Compaq shares, fund managers believed the two firms are more valuable as separate businesses.

"It is better to hold stock in both companies rather than take on these enormous risks," Macht said. Analysts were mixed on what the effect Calpers' decision would have. Some said they would not be swayed by the giant pension fund, but others said the no-vote would hurt the merger's chances.

"I think that hurts the merger possibility," analyst Papp said. "Not only do you lose the vote but you have a respected group voting against it. It is a little bit of a surprise."

Shares of Hewlett-Packard closed up 59 cents, or 3.0 percent, at $20.59 on the New York Stock Exchange on Friday, while shares of Compaq closed up 65 cents, or 5.8 percent, at $11.80.

(C) Reuters Ltd.