Nation's Largest Pension Fund Dislikes H-P-Compaq Merger

Influential pension fund CalPERS, the California Public Employees Retirement System, joined the high-profile opponents of Hewlett-Packard's (HWP Quote) merger with Compaq (CPQ Quote). CalPERS is outspoken in its pursuit of securities litigation and corporate accountability, and its opinion will bear more weight than its 0.35% stake in H-P.

Friday afternoon CalPERS issued a recommendation to vote against the merger because of "immediate and potential long-term negative financial risk." Additionally, CalPERS objected to the price tag of the $25 billion deal and the "strategic uncertainty" surrounding the pairing. H-P shareholders are set to vote on March 19 to either approve or reject the deal.

The move will be music to rogue board member Walter Hewlett's ears. As a member of one of two founding families that control more than 18% of H-P shares, Hewlett has argued for the past several months that while the Compaq acquisition would make H-P a larger presence in many of its markets, it would erode shareholder value. Earlier in the week, CEO Carly Fiorina and H-P management won the backing of crucial advisory service Institutional Shareholder Services, which counts 20% of H-P's institutional shareholders among its clients.

H-P closed at $20.59 Friday, flat from Tuesday's close, before the ISS report. Compaq rose 12% since the report, closing Friday at $11.80.

The ISS report conveyed that it was impressed by an extensive team of around 600 people working on an integration plan for H-P and Compaq, but those efforts did not sway CalPERS, which believes there is still "significant risk" to joining the two and holds that combining the companies is not the best route to creating value.

While CalPERS ranks as the 30th largest institutional H-P shareholder, the organization is widely held as a formidable ally, or foe, of corporate executives. CalPERS manages the pensions and health benefits of 1.2 million California public employees and retiree families and had a portfolio value of $152 billion as of Dec. 31, 2001.