SAN FRANCISCO, March 18 (UPI) -- Hewlett-Packard Co. and Compaq Computer Corp. will take their companies' proposed $20.5 billion merger to a shareholder vote Tuesday in the largest computer industry merger ever.
Carly Fiorina, H-P's chief executive officer, has argued that the bigger company would increase profits by selling services and more profitable server computer systems.
Walter B. Hewlett, son of a company founder and a company director, is leading the proxy fight against the merger, saying the Palo Alto, Calif.-based company would fare better as it is.
In letters to shareholders and newspaper advertisements, Hewlett said the deal would increase to company's reliance on low-priced computers and damage the firm's lucrative printer business.
Compaq shareholders are expected to vote for the deal. Tuesday's meeting was scheduled to begin at 8 a.m. PST at Silicon Valley's Flint Center.
Both Fiorina and Hewlett claim support in their six-month battle over the merger.
"In terms of institutional investors, when the vote is counted it will be split down the middle," said Charles R. Wolf, an analyst with Needham & Co. Inc. in New York. "I would anticipate that the vote would be decided by individual investors."
Wolf explained that Hewlett's campaign against the merger could have an emotional impact on shareholders "who might find it difficult to vote against the founders."
In a statement released Monday, Hewlett reminded shareholders that his family and the Packards collectively still have a $7 billion stake in the company.
"I ask that as stockholders in the final hours decide how to vote their shares, they consider who shares the greatest economic interest in H-P -- the Hewlett and Packard interests or those who would have you approve a $25 billion mistake," he said.
Messages left with Compaq spokesman Arch Currid were not returned.
On Thursday, pension funds for California teachers and Ohio public workers said they planned to vote against the proposal, saying it threatened profitability.
The California State Teachers' Retirement System, based in Sacramento, said it would cast its 3.3 million H-P shares against the merger. The pension fund also owns 5.3 million shares of Compaq in its $100 billion investment portfolio.
"The integration risk seems too great to overcome on a transaction this large and complex," said Jack Ehnes, CalSTRS chief executive officer, in a statement. "The merger would dilute H-P's position in its profitable printer and imaging unit."
The Public Employees' Retirement System of Ohio said it would vote 4 million shares against the merger. Both funds joined the California Public Employees' Retirement System, which is the nation's largest pension fund, in voting against the merger.
In a research report released Monday, UBS Paine Webber analyst Don Young said "customer defections (would) outweigh any Compaq and H-P merger benefits."
Young argued that H-P should keep its focus on its crown jewel printer and imaging unit rather than expanding its personal computer unit.
The backers include Banc One Corp., Putnam Investments, Barclays Global Investors, Alliance Capital Management and Intel Corp. Intel, which is based Santa Clara, Calif., will cast a positive vote with the 58,836 shares it directly owns.
If approved by shareholders, the H-P, Compaq deal would rank as one of the biggest technology mergers in history, creating a combined company with an estimated $87 billion in sales. The companies have said that their merger will result in 15,000 job cuts.
William Hewlett and David Packard founded their company with $539 in 1939 in Packard's garage. The company's success came from their strong technology, which produced several commercial successes including testing equipment and pocket calculators.
Houston-based Compaq was founded in February 1982 by Rod Canion, Jim Harris and Bill Murto, three senior managers who left Texas Instruments and invested $1,000 each to form their own company. The first product was a portable personal computer able to run all of the software being developed for the IBM personal computer.
Shares of H-P gained 20 cents, or 1.05 percent, to close Monday at $19.25 on volume of 19.8 million shares traded, while Compaq shares gained 3 cents, or 0.29 percent, to close at $10.36 on volume of 30.4 million shares traded.
Both H-P and Compaq are traded on the New York Stock Exchange.