Peter Henderson
SAN FRANCISCO: Shareholders in Hewlett-Packard Co. have a few weeks remaining
to consider how they will vote on the company's controversial plan to buy Compaq
Computer Corp, but the fate of the $21 billion deal could effectively be sealed
this week, analysts say.
An estimated 10 per cent of HP shares -- a block that could determine whether
or not the largest-ever computer merger succeeds -- will be voted in accordance
with the opinion of Institutional Shareholder Services, which plans to disclose
its position on the deal by Tuesday.
ISS, as it is known, advises some 700 funds how to vote in proxy battles, and
many of its clients are obligated because of the structure of their funds or
potential conflicts of interest to follow ISS advice.
Although some fund managers expect ISS to side with HP management and endorse
the merger, a surprise decision by the Bethesda, Maryland-based firm to oppose
it could sway enough votes to all but scuttle the deal, which has failed to
muster much enthusiasm on Wall Street, analysts say.
Noel Dedora, portfolio manager at San Francisco's Fremont Investment
Advisors, said his company would vote for the merger, preferring as usual to
vote with management. The uncertainty of scuttling the deal would be costly, he
said.
Even so, Dedora said he was interested to see the ISS decision. "If the
vote favors the merger then it certainly ups the odds considerably, but if the
ISS vote goes against it, it is probably a toss up. I don't think it will
destroy it," he said.
Hewlett vs. Fiorina
The battle over the merger has grown nasty in recent days, pitting HP Chief
Executive Carly Fiorina, who says the merger would create a technology
powerhouse to rival IBM Corp., against dissident director Walter Hewlett, who
says the deal would saddle the company his father co-founded with a low-margin
personal computer maker.
Hewlett wants Fiorina fired if the deal is scrapped. Fiorina says Hewlett has
been deceptive by leaking details of discussed executive pay deals as well as by
floating talk of bringing back former HP CEO Lew Pratt to steer the company in
the interim.
Both sides have buttressed their views with studies commissioned by outside
analysts.
"We will make our own decision," said Kar Ming Leong, a technology
analyst for Dreyfus Corp., an ISS client which held about 2.6 million shares of
HP on Dec. 31, 2001. "This time it is slightly different, because it is a
high-profile thing. I think the shareholders, other than the index funds, would
like to voice their own opinions."
ISS was expected to back management, Leong said.
"When was the last time ... that you saw ISS oppose a deal? Not in
anybody's recent memory. On the other hand, if ISS said no, it is probably a
bigger factor," he said, but declined to say which way Dreyfus was leaning.
Index mutual funds, which build portfolios that match the composition of
stock indexes like the Standard & Poor's 500, represent around 9 or 10 per
cent of HP shares, according to several industry analysts. They will vote with
ISS as will Barclay's Global Investors, with 3 per cent of HP stock, since its
chief executive, Pattie Dunn, also sits on HP's board.
As a result, a negative ISS opinion would sway votes that combined with the
18 per cent stake of founding family interests opposed to the deal and a few per
cent held by anti-merger, outside investors could leave a third of HP shares
aligned against the deal.
Institutional investors with a few per cent of HP shares have openly backed
the deal, but neither side has been able to rely on retail investors with around
25 per cent of shares, leading one opponent to conclude: "If ISS goes for
us, then it is a rout. If ISS goes for them, then it's a horse race."
Opponents outgunned, have head start
But outsiders have learned to never say never in the five-month-long HP
merger battle.
Walter Hewlett's opposition in November had market players sure the deal was
dead -- for a few days. Similarly, the Packard Foundation's December decision to
vote "no" with its 10 per cent of shares appeared to kill the deal
again.
But that was before an aggressive campaign by management to sway outside
investors. HP shares, at $20.21 at Friday's close on the New York Stock
Exchange, were down 13 per cent since the deal was announced on Sept. 3,
compared to a 3 per cent rise for IBM over that period.
A number of analysts see management building a silent majority. Bear Stearns
analyst Andrew Neff thinks the deal is a bad move, but said HP management simply
has the stronger hand. "The odds are that management will prevail," he
said. "It is too hard to call right now, just because Walter has a head
start. I think he is outgunned, generally."
Sanford C. Bernstein analyst Toni Sacconaghi, who gives 2-to-1 odds that the
deal will be voted down, said he thought only about 20 per cent of institutional
shareholders who planned to make their own decisions were still waiting to do
so.
"But as in any voting situation, recency and momentum can definitely
sway lingering uncertain votes," he said.
Opponents of the deal outside the company have been much more vocal than
supporters, arguing that Compaq's PC business, No. 2 after losing the lead to
Dell Computer Corp last year, was commodity-oriented and would dilute the value
of HP's higher-margin printing franchise.
Many passionate retail investors posting on Internet message boards backed
that point of view, but HP management has beaten Wall Street financial
expectations for the past two quarters, after a year of profit disappointments.