Wild card in Hewlett-Compaq vote

THE Hewlett-Packard merger battle that reads like a Hollywood script - with warring board members, California aristocracy, ambitious executives, excessive riches and wary institutional investors - is about to enter the deciding round.

After meeting analysts in New York on Wednesday to pitch the Compaq deal, Hewlett chief executive Carly Fiorina now focuses her attention on Washington, where an influential shareholder group will issue an opinion in the next few days on the controversial $21.3bn (£14.9bn) corporate marriage.

Institutional Shareholder Services advises big pension and mutual funds, including many in Britain, on how to vote on proxy issues. Its decision on Fiorina's attempt to merge America's leading PC makers could tip the balance as ISS members hold 57% of HP shares.

Although most large institutional shareholders such as Vanguard Investments and Alliance Capital Management also do their own analysis, the recommendations of ISS in big proxy battles often have an impact on the outcome. Last year's controversial merger between banking giants Wachovia and SunTrust ultimately prevailed after gaining the ISS seal of approval.

A few portfolio managers have already said which way they will vote on HP-Compaq. Brandes Investment Partners says it would vote its sizeable holdings, equal to 1.3% of HP at the end of 2001, against the deal. Smaller fund L Roy Papp & Associates said it would support management in favour of the merger.

David Dando, of the London office of ISS, said that several large UK funds hold significant stakes in HP. The group's shareholders will not officially cast their votes until 19 March, but the result should be predictable by then. If ISS advises against, Fiorina's uphill struggle is likely to become even tougher.

'The big institutions will ultimately decide for themselves, but most of our clients use our analysis as a part of their decision,' said ISS's Ram Kumar.

The case for the merger has not been helped in recent days by an escalating war of words between HP and disgruntled board member Walter Hewlett, the cello playing philanthropist and son of Bill Hewlett, the California tech pioneer who started HP in a Silicon Valley garage.

Walter, who opposes the merger, said Fiorina and Compaq chief Michael Capellas held behind-the-scenes talks over huge pay packages in the combined company. The pay talks were put on hold but the size of the packages under discussion - $117m between the two - has raised eyebrows among shareholders and compensation executives.

According to board member Walter, Fiorina was negotiating a package worth $70m over two years, against a maximum $14.5m in salary and options she made last year. HP said there is no agreement with top executives on post-merger pay and has accused Walter Hewlett of spreading 'mis-information'.

The bitter feud between a member of the founding family of a company and the new executive team running it has captivated Wall Street which is not accustomed to such public displays of disharmony from the corporate suite.