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Wall Street still wary of HP-Compaq

Hewlett-Packard may have declared victory in its proxy fight for the Compaq Computer deal, but judging by Wall Street's immediate reaction, investors aren't so sure.

Hewlett-Packard may have declared victory in its proxy fight for the Compaq Computer deal, but judging by Wall Street's reaction Wednesday, investors aren't so sure.

At market close, Compaq shares were down 32 cents to $10.82, and HP shares were off 60 cents to $18.20. Under the rules of arbitrage--a trading technique designed to take advantage of small differences in the price of two stocks--Compaq shares should be rising as HP falls if traders believe the deal is a lock.

Now both stocks are in a rut. According to the terms of the proposed merger, which set a fixed ratio of 0.6325 shares of HP for every share of Compaq, Compaq should trade just below $12 based on HP's current price.

"The spread still indicates that arbs see significant risk to the deal," said Merrill Lynch analyst Steven Milunovich.

On Tuesday, Compaq shares surged once HP CEO Carly Fiorina declared the company's proposed acquisition was won by a "slim but decisive" margin. After Fiorina's comments, the spread between the two stocks fell to 75 cents from an opening spread of $2.31 to indicate the "greatly improved odds of the deal being approved," said Lehman Brothers analyst Dan Niles.

But those gains evaporated in both after-hours and Wednesday's trading. Walter Hewlett, who led the opposition to the merger, said HP's take was premature.

Wall Street analysts sided with Hewlett, with a few using Yogi Berra's "It ain't over till it's over" mantra to describe the HP vote.

Analysts said the fate of the deal is just as uncertain as it was before Tuesday's vote, which explains why the spread between HP and Compaq remains large.

ABN AMRO analyst Bill Shope said in a research note that "the outcome of the vote will remain uncertain for several weeks."

"And if the margin is still slim at that time, either side can contest the vote, dragging the process out even longer," he said.

Prudential Securities analyst Kimberly Alexy said in a research note: "We think it will take one to three weeks before an official count is complete. Late in the process, some very large shareholders came out in favor of the deal. This may have tipped the vote in favor of the merger."

No matter what the outcome of the vote, a bevy of analysts reiterated that they were against the deal, with most citing the challenges of integrating the two companies.

"Based on our analysis, we did not view the Compaq merger as the best strategic option for HP, and we see a very challenging road ahead for the company," Alexy said.