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Pension funds take sides on HP merger

Two more state employee pension funds announce they plan to vote their shares against Hewlett-Packard's proposed merger with Compaq; a third says it will vote in favor.

Two more state employee pension funds said Thursday that they would vote their shares against Hewlett-Packard's proposed merger with Compaq Computer, while a third said it would vote in favor of the deal.

See special coverage: A Fight to the Finish The Public Employees Retirement System of Ohio and the California State Teachers' Retirement System became the latest institutions to announce their opposition to the deal, which is already opposed by the California Public Employees' Retirement System, or CalPers, the nation's largest pension fund.

However, the State Teachers Retirement System of Ohio told CNET on Thursday it planned to vote its shares in favor of the deal, bucking a trend of pension funds coming out against the deal. The Ohio teachers group, which owns 3.5 million HP shares and 4.3 million Compaq shares, said it met with both sides before making its decision earlier this week.

Ohio representative Laura Ecklar said the staff of the teachers' fund made its decision based on several factors, including the amount of integration planning the two firms had done, their confidence in the projected cost savings as well as faith in management, in particular Compaq CEO Michael Capellas. Ecklar said that although the revenue projections might be aggressive, HP will be aided in meeting those goals by a broader recovery in technology spending.

The other Ohio group, which owns approximately 4 million shares of HP and 4.3 million shares of Compaq, said in a statement that although the merger could produce cost savings, it would also dilute HP's printing business and increase the company's exposure to the commodity PC business. However the fund, which bills itself as the world's 18th largest pension system, said its vote was not a referendum on HP's management.

The California teachers fund, which holds 3.3 million HP shares and 5.3 million Compaq shares, said it was voting against the deal because of concerns about the integration risks as well as dilution of HP's printing and imaging business. Calstrs said it is the third-largest pension fund in the United States.

"It is our responsibility to ensure the strongest possible investment portfolio for California's educators. Therefore, in carefully studying this issue, we listened to both sides in the contest. Both were very persuasive," CalSTRS CEO Jack Ehnes said in a statement. "However, on a portfolio-wide basis, as a long-term investor, we do not believe the transaction is in the best interest of the CalSTRS members and beneficiaries."

"We are delighted that more and more HP stockholders are publicly announcing their opposition to the Compaq merger," Walter Hewlett said in a statement, noting that both the Ohio employees' and California teachers' funds are clients of key advisor Institutional Shareholder Services, which has recommended clients approve the deal.

An HP representative took issue with the notion that the merger represents a risk to pension funds and other investors.

"The greater risk to employees, shareholders and customers is standing still," the representative said. "We look forward to the vote on Tuesday."

The proposed mega-merger, which is currently valued at more than $21 billion, is being opposed by board member and Hewlett heir Walter Hewlett, as well as Hewlett and Packard family members and institutions representing 18 percent of HP shares. Institutions representing about 3 percent of HP shares have come out against the deal, while those representing about 8 percent of shares have come out in favor.

The deal requires the approval of more than 50 percent of shares voted, whether by proxy or at a special meeting of HP shareholders to be held Tuesday, March 19.