Although institutional investors hold about twice as many HP shares as individuals do, the latter could become key if the votes from money managers are just enough to offset the opposition from the heirs of company founders David Packard and William Hewlett.
Institutional investors hold about 54 percent of HP's shares. If roughly two-thirds of these money managers vote in favor of the deal, then the vote will be split even. This would make individual share owners the deciding factor in the emerging battle for votes.
"With the foundations (and families) going against them, it appears (HP has) to put a full-court press on individuals as well as institutions," said one Wall Street analyst who covers the PC industry.
If institutional investors are split 50-50 on the deal, then individual shareholders would need to vote in large numbers with more than 4-to-1 in favor of the deal for it to pass. But if many more than half the institutional votes go against the deal, the individual shareholder votes are less important because the deal would already be sunk for sure.
It is hard to say just how the average investor will vote.
"Right now it's sort of a soap-operatic interest, but it's very hard to tell," said Daniel Kunstler, an analyst at J.P. Morgan Chase.
Individual investors normally support management when it comes to a dispute, Kunstler said. But the media attention this deal has received and the opposition by Hewlett and Packard heirs could make this vote different.
HP employees themselves own about 2 percent of HP shares, though their stock could show up as either institutional or individual holdings. Regardless, HP has been actively trying to build support for the deal among its staff.
The shareholder vote, assuming it happens, will take the form of a proxy battle in which both proponents and opponents solicit votes. Although proxy battles are not uncommon, the HP-Compaq battle has created far more drama than typical conflicts--partly due to the heirs' opposition.
By contrast, a proxy fight between paper companies Willamette Industries and Weyerhaeuser has been raging for more than a year. But few people outside financial circles and the paper industry even know the battle is going on.
Battles for shareholder votes typically occur in certain situations:
During a hostile takeover, in which an outsider wants to buy a company, such as in the Willamette-Weyerhaeuser battle
Amid a fight for control of a company's board
Or, as in the HP-Compaq merger, when there is shareholder-led opposition to a deal that is struck by management and requires stockholder approval
Often, contested battles don't even make it to a shareholder vote, with one side giving up or a compromise being reached.
However, HP and Compaq have a big incentive to push for a vote. Each faces a $675 million break-up fee if its side backs down.
Unlike a political election, in which voters receive letter after letter with candidates slamming their opponents, the written material in most proxy battles consists largely of just two documents: the cards used by shareholders to vote and the proxy statements, in which proponents or opponents lay out their cases in great detail. However, companies are allowed to send additional mailings.
HP and Compaq have already prepared a preliminary version of the joint proxy they plan to send to their respective shareholders, although it will be some time before the companies receive comments from the Securities and Exchange Commission and are ready to print and send the final mailing.
As for the voting cards, shareholders may receive a number of such cards. If they send in more than one card with a vote, it is the most recently dated and signed card that is counted. Shareholders can even change their position in person at the actual shareholders meeting where the vote is tallied.
Although institutional investors are typically required to vote, individuals are under no obligation. For the merger to win, a simple majority of all HP votes cast must be in favor of the deal. By contrast, Compaq's corporate rules require that a majority of all shares outstanding--whether or not all shares are voted--be in favor of the merger. Compaq shareholders also must approve the deal for it to go through, but that vote is seen as far less contested than HP's.
To prepare for the battle for shareholder votes, Walter Hewlett and HP have each lined up an impressive arsenal of law firms, proxy solicitors, investment banks, consultants and spinmeisters.
HP's advisers include proxy solicitor Innisfree and Georgeson, investment bank Goldman Sachs, law firm Wilson Sonsini Goodrich & Rosati, and investor relations consultant Sard Verbinnen.
For its shareholder vote, Compaq has a team of its own, including investment bank Salomon Smith Barney, law firm Skadden Arps Slate Meagher and Flom, investor relations firm Kekst, and proxy solicitor Georgeson.
Neither HP nor representatives of Walter Hewlett will detail their strategies, but both are clearly ready for a fight.
"We obviously remain very focused on making sure our investors, both institutional and (individual), understand the merits of the merger," said Webb McKinney, president of HP's business customer unit and head of the committee handling integration issues for the two companies.
Walter Hewlett appears equally ready, vowing last week to solicit votes against the deal should HP continue to pursue a vote on the matter.