The HP Fight Is Still Too Close to Call

Neither Fiorina nor Hewlett is in a position of strength

For an investor who controls less than two-tenths of one percent of Hewlett-Packard Co. (HWP ) stock, Kevin M. Rendino is getting a lot of attention these days. As the bitter fight over the company's plan to merge with Compaq Computer Corp. (CPQ ) draws to a close, the Merrill Lynch & Co. portfolio manager is being inundated daily by proxy cards, letters, and press releases--not to mention phone calls. On Mar. 11, an aide to Walter B. Hewlett, the dissident board member who opposes the deal, called to alert Rendino that an influential shareholder was going to vote no. The next day, HP management called him to see if he needed any more help making up his mind about the pending deal. "Enough is enough already," says Rendino, who won't say how he will vote.

But with just days to go until the Mar. 19 vote that will decide the merger's fate, expect the two sides to stoke their campaigns even more. So far, holders of just 29.34% of HP's outstanding shares have publicly committed to either side--21.59% against, including the 18% controlled by Walter Hewlett, David Woodley Packard, and their families' foundations, and just 7.75% for management.

But if Hewlett has the early edge, a close look at the outstanding votes makes clear the race remains tight. BusinessWeek has learned that portfolio managers who hold 1.59% of the shares plan to vote for the deal while holders representing 1.93% say they will vote no. And HP will likely pick up 8% from index funds. They typically follow the recommendations of Institutional Shareholder Services, the Rockville (Md.) shareholder proxy adviser that came out in favor of the merger on Mar. 5. Analysts expect management to get 2% from HP employees and retirees, while the opposition could get 3%. And Wall Street expects both sides to pick up roughly 6% from individual investors.

Add it all up, and that brings the total opposing the deal to 32.52%, and those in favor to 25.34%. The remaining 42.14% of shares holds the key. To win a majority, HP will have to grab about 60% of those votes.

So far, most of the company's top 20 institutional shareholders--who control over half those remaining shares--plan to vote with management, according to HP director Phil M. Condit. Three--Barclays Global Investors, Putnam Investment Management, and Alliance Capital Management--have said that they will.

Yet HP's hold on its top investors might be weaker than it thinks. BusinessWeek has also learned that the portfolio manager at one of HP's top 15 institutional shareholders will oppose the deal. This manager doesn't want HP's profitable printer-and-ink business diluted by a merger and frets that less than 20% of computer-industry tieups succeed. Since Mar. 8, five institutions with smaller stakes, including CalPERS, Wells Fargo, and Banc of America Capital Management, have come out publicly against the deal.

How other institutions will vote depends on which outcome they fear more: cleaning up a failed megamerger or finding a new chief executive if the deal fails and CEO Carleton S. Fiorina is forced out or quits. But it's becoming less certain that she would leave if the deal is turned down. While Fiorina has refused to divulge her plans, an insider who knows the board's views says: "There is a good chance that Carly could, and should, remain CEO even if the merger fails to pass." That's just one more variable for weary investors to ponder.

By Andrew Park in Dallas and Peter Burrows in San Mateo, Calif.

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