Pension funds and their money managers are facing what many call the most difficult proxy vote they can recall - Hewlett-Packard Co.'s proposed merger with Compaq Computer Corp.
"We've agonized more on this vote than any other vote in the last few years," said L. Roy Papp, partner, L. Roy Papp Associates, Phoenix. "You don't get challenged very often this way in a proxy vote."
Mr. Papp said his firm will vote in favor of the acquisition. "We're not enthusiastic" about supporting management. But "the edge goes to it."
He said Papp retains discretion to vote on about half of the 815,000 shares it owned of H-P as of Jan. 31. Among those clients who are voting their own shares, "some clients have voted so far and we've seen mixed results," Mr. Papp said. Papp owns 26,000 Compaq shares.
Barclays Global Investors, San Francisco, one of the largest shareholders of both Hewlett-Packard and Compaq, made the unusual decision to give complete voting discretion to Institutional Shareholder Services Inc., Rockville, Md., because of an inherent conflict of interests: Patricia C. Dunn, co-chairman and global chief executive of BGI, is a member of Hewlett-Packard's board of directors. Ms. Dunn has signed full-page advertisements endorsing the acquisition.
"This is one of the rare instances where we are outsourcing the entire voting," said Thomas Taggart, director-communications. "Usually we are active in voting proxies."
Barclays will give ISS discretion on both the Hewlett-Packard and Compaq votes, said Mr. Taggart. "We will have no influence on how ISS votes," he said.
Barclays Bank PLC, which owns BGI, a giant index fund manager, is the second largest institutional shareholder of both Hewlett-Packard and Compaq stock, with 60.2 million shares of each as of Dec. 31, according to 13f reports to the Securities and Exchange Commission, compiled by Thomson Financial, a unit of Thomson Corp.
The most influential institutional voter could be one that doesn't own any shares - ISS. It is expected to wield enormous influence on how institutions vote their proxies.
"A lot of eyes will be on ISS and how they vote," said Michael Wong, portfolio manager at Wells Capital Management, Helena, Mont.
"Our recommendation could be market moving," said Patrick McGurn, ISS vice president and director-corporate programs. It has some 750 clients; some give it discretion on voting, while others subscribe to the research to use in deciding how to vote.
Proxy Voter Services, a division of ISS that has mainly Taft-Hartley pension fund clients, will make its recommendation simultaneous to ISS.
Capital Research & Management Co., Los Angeles, and Putnam Investment Management, Boston, are the largest institutional shareholders, respectively, of H-P and Compaq, with 66.9 million shares and 68 million shares. Representatives of each manager declined to comment on the vote.
Shareholders for both companies must approve the merger. The H-P vote is March 19; the Compaq vote is March 20. Many investors said Compaq shareholders appear to favor the merger, unlike H-P shareholders, who are widely divided or undecided.
Wells Capital's Helena-based large-cap portfolio group holds about 5 million of the approximately 14 million Hewlett-Packard shares owned by Wells Capital-related entities. Officials haven't decided how to vote the shares, Mr. Wong said, saying the group will look at ISS' recommendation but make its own decision. The Helena group owns no Compaq stock.
Like the Wells Capital group, many institutional holders have met or have scheduled meetings with Hewlett-Packard management and the opposition, led by Walter B. Hewlett, the director of Hewlett-Packard who has been outspoken in his opposition to the merger.
Mr. Wong said the Helena group met with Mr. Hewlett's representatives and has a meeting this week with management. Mr. Papp said Papp portfolio managers already met with representatives of both sides. "We've gone directly to the company and the opposition," Mr. Papp said. "We aren't using Wall Street research."
The $101 billion California State Teachers' Retirement System, Sacramento, which, as of Dec. 31 owned 5.7 million shares of Hewlett-Packard and 5.4 million shares of Compaq, hasn't yet decided how it will vote. Christopher J. Ailman, chief investment officer, met recently with Mr. Hewlett and plans to meet with management.
CalSTRS subscribes to the research of ISS and the Investor Responsibility Research Center, Washington, but makes its own decisions on voting. IRRC, unlike ISS, doesn't recommend votes on proxies, only providing research on issues.
CalSTRS won't disclose its decision until after the proxy vote.
The $152 billion California Public Employees' Retirement System, Sacramento, plans to reveal this week or next how it will vote its shares, said Brad Pacheco, a spokesman. It had 7.6 million shares of H-P as of Dec. 31, according to Thomson. Its recommendation is expected to be influential, too, because many public pension funds, as well as other investors, use CalPERS' decision in their own evaluations. CalPERS, although it makes its own decision, uses ISS research in its evaluation, Mr. Pacheco said. CalPERS owned 6.6 million shares of Compaq as of Dec. 31.
AXA Rosenberg Institutional Management LLC, Orinda, Calif., gives authority to vote to ISS, "unless the account requests us to vote using other guidelines," said William E. Ricks, chief investment officer. Parent company AXA Financial Inc. owned 45.8 million shares of Hewlett-Packard and 11 million shares of Compaq as of Dec. 31, according to Thomson.
Northern Trust Investments Inc., Chicago, has not decided how it will vote, said Jamie G. Ziegler, senior vice president. Its investment staff considers the research recommendations of ISS in making its decision, she said. It owned 13.6 million shares of Hewlett-Packard and 7.5 million shares of Compaq as of Dec. 31, according to Thomson.
At the General Board of Pensions and Health Benefits of the United Methodist Church, Evanston, Ill., Vidette Bullock Mixon, director-corporate relations and social concerns, said, "We defer to our investment managers to advise us. That's how mergers and acquisitions are handled in our shop. I haven't heard what their recommendations are. If there is a difference of opinion, then we take the recommendation of the manager with the most shares." She declined to disclose how many shares of Hewlett-Packard and Compaq the $10.9 billion fund owns; it isn't listed by Thomson.
At the $88.5 billion Florida State Board of Administration, Tallahassee, Elizabeth Mozley, corporate affairs manager, said the fund is researching how it will vote. It uses research of ISS and IRRC as part of its decision-making process. According to Thomson, Florida owned 3.7 million shares of Hewlett-Packard and 3.3 million shares of Compaq as of Dec. 31. Mr. Hewlett's opposition representatives met with staff in Tallahassee. The staff is trying to schedule a meeting with management.
In terms of the fundamentals of the deal, Mr. Papp said, "the opposition argues that big mergers don't work in technology. But there haven't been many big ones. That's what makes this so exciting."
"I think we won't be a buyer or seller of shares of H-P or Compaq until after the vote because of the uncertainty of how to value the merger," Mr. Papp added.
At Wells Capital, Mr. Wong said the group is maintaining its position in Hewlett-Packard, that it is neither buying nor selling. He said Compaq is now trading at around $10 a share, about a 20% discount from the expected terms of the deal, equivalent to $12 a share.
"So if you thought the deal would go through, you'd want to bulk up on Compaq," Mr. Wong said. Because of the uncertainty, Wells Capital isn't buying.
The largest H-P shareholder - the David & Lucile Packard Foundation, Los Altos, Calif., with 201 million, or 10.4% of the total shares - announced it will vote against the merger, as have the William and Flora Hewlett Foundation, Menlo Park, Calif., and the William R. Hewlett Revocable Trust, which together own some 108.5 million shares, according to filings with the Securities and Exchange Commission.
With the Packard Foundation and the Walter B. Hewlett group - including the Hewlett foundation and trust - owning some 16% of H-P shares, Mr. Wong said he figures "management will need in excess of 60% of the remaining shares in the market" to attain the simple majority that would be required to win.