Sunil Reddy, portfolio manager of the Fifth Third Technology Fund in Cincinnati, said he plans to vote his stake of roughly 750,000 shares, far less than 1 percent of HP's outstanding stock, against the deal. Reddy said integrating the two companies will be a challenge, while the deal will cut in half the percentage of sales HP gets from its profitable printing and imaging business.
"Why should you incur that risk while getting an unattractive mix of business?" Reddy asked in an interview.
However, early returns in a proxy race are not necessarily indicative of a final vote. In this case, companies representing more than half of HP's shares still haven't signaled which way they are leaning, making Tuesday'sfrom Rockville, Md.-based all the more important. Still, like in the last presidential election, every vote could end up counting.
Fifth Third joins a number of firms and other organizations that are said to be opposing the deal, including Brandes Investment Partners, Victory Capital Management and Matrix Asset Advisors. Formal opposition to the merger began to gel last year when the Hewlett and Packard family members and foundations, which collectively own 18 percent of HP's shares, came out against the merger. In total, at least 21 percent of shareowners have said they plan to vote against the deal.
"I respect Carly (Fiorina, HP CEO) for taking a stand and thinking boldly, but I think Compaq is not good enough for HP," said a fund manager at one institutional investor, which owns less than 1 percent of HP shares. The company did not want to be identified.
Alliance Capital is the largest shareholder that has publicly come out in favor of the deal, along with smaller firms such as L. Roy Papp Associates. Compaq CEO Michael Capellas has also said he expects Putnam, which owns 2.5 percent of HP's shares, to back the deal. Assuming that's the case, at least 5 percent of HP's shareholders are confirmed in support of the deal.
A representative of another fund with a small HP stake said it was initially lukewarm to the merger, but the firm now plans to support the deal.
"We're not going to tell everyone this is the greatest deal ever," said the representative, on the condition the firm not be identified. But "we think the best option long term for shareholders is to support the transaction."
To win approval of the blockbuster, HP needs to get more than 50 percent of shares that are voted either by proxy or in person at a of shareowners on March 19. Compaq's shareholders must also approve the deal, though that vote is seen as far less contested.
Hundreds of HP and Compaq shareholders will receive the ISS report, although it is unclear how many will make their decision solely based on that firm's recommendation. Large HP shareholder Barclays Global Investors has said it will side with ISS because Barclays Chief Executive Patricia Dunn is on HP's board of directors. Barclays owned 3.1 percent of HP's shares as of Dec. 31.
And the decision on how this mega-merger will be resolved may not happen until virtually the 11th hour. Several large HP institutional shareholders have said they plan to wait until a day or two before the shareholders meeting to cast their vote.
"We're still studying the issues and will make the best decision for our investors," said Horton Shapiro, senior vice president of Dodge & Cox Funds, which holds a 1.1 stake in HP and has met with both Walter Hewlett and Carly Fiorina. "It's likely we'll wait a day or two before the vote to cast our proxies, since there's no reason to rush it."
Shapiro added that his fund is not a client of ISS and is not influenced by how other institutional investors plan to vote their shares.
A representative with State Street agreed that many will wait until the last minute to vote. State Street holds a 2.4 percent stake in HP.
Marty Shagrin, an analyst at Victory Capital Management, said his firm is leaning toward voting against the deal, but he said he's trying to keep an open mind, noting that the votes aren't due until mid-March.
"We have some concerns around the deal," Shagrin said. "If we had to have our votes in today, we probably would not be in favor of it."
However, a growing number of fund managers, some of whom are ISS clients and some of whom are not, say they've already made up their mind.
A representative of one of HP's 15 largest institutional shareowners, speaking on the condition of anonymity, said that his firm plans to vote against the deal, citing a lack of execution by Fiorina in the past.
"Our problem with the deal is the lack of execution that has happened with the management team in place," the representative said. "And with this merger you're asking them to suddenly be able to execute on areas where they needed to in the past but haven't been able to. Some of the areas where they haven't executed include managing the channel, going to market, managing their channel versus direct sources. These have been HP's Achilles' heel in the past, and now they're suddenly going to get it right?"
Noel DeDora, managing director of San Francisco-based Fremont Investment Advisors, said his firm planned to vote its small HP stake in favor of the deal. Although he expects the combined company to lose some revenue, he believes cost savings and other synergies can more than make up for the lost sales.
"I think there probably is justification for the merger," DeDora said.
One group for whom the ISS report may be especially meaningful are all of the index funds that own HP shares because the company is part of the S&P 500 or some other index. Index funds are said to own somewhere between 5 percent and 10 percent of HP shares.
A fund manager said that HP is also likely to garner more support among fund managers that invest for the long term than from shorter-term investors.
Another swing vote is HP employees, who make up somewhat more than 2 percent of shareholders. Polls commissioned by David Packard at three HP locations show two-thirds of workers opposed to the deal, while HP has said internal polling shows two-thirds of workers are either strongly supportive or somewhat supportive of the deal.
News.com's Larry Dignan contributed to this report.