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The biggest pension fund in the US came out against the merger of Hewlett Packard Co and Compaq Computer Corp on Friday, marking a bitter end to what had been a sweet week for the pro-merger camp.

However, dissident HP board member Walter Hewlett will be delighted by the California Public Employees' Retirement System's (Calpers) decision to endorse his opposition to the merger. Although it controls less than 1% of HP's stock, Calpers is seen as a benchmark for activist pension funds in the US and its decision could well influence any institutions which have yet to make a decision on how to vote. Calpers also owns a less than 1% stake in Compaq.

Calpers' reasons for coming down against the deal closely echoed Hewlett's own arguments. These included the high premium being paid for Compaq, the claimed negative financial consequences of the merger, integration risks and the danger of losing focus on HP's core strengths.

Calpers said the decision "is not a referendum on HP's management team or its CEO Carly Fiorina." Rather, the fund said, it felt that its portfolio would be better served by HP remaining a "best of breed company" in imaging, while strengthening its storage, service and high-end computing businesses.

A number of other funds have reportedly said privately that they would vote against the merger.

An HP spokeswoman said the company was "disappointed" at Calper's decision.

However, she rejected the fund's conclusions. She said that by historic standards, HP was paying a low premium for Compaq, and said that the companies had expended a massive amount of effort addressing the integration issues. As far as the financial consequences go, she said the deal would realize $2.5bn in annual cost savings. She reiterated the company's contention that the deal would strengthen HP's services, PC and high-end computing operations, meaning it could invest more in the imaging business and chase new emerging imaging markets.

The Calpers declaration came just days after the HP/Compaq merger gained the support of Institutional Shareholder Services, which advises major investors how to vote in proxy battles, and gained FTC clearance. Both events were seen as adding momentum to the pro-merger campaign. Calpers' declaration demonstrated that the race will indeed go right to the wire.

With the shareholders vote just a week ago and too close to call, HP and Hewlett are fighting over the waverers. An SEC filing on Friday detailed an article posted on the company's internal web site encouraging employee shareholders to cast their votes. The article also details the procedures for the shareholders meeting. Employees are encouraged to take public transport or car-pool, because of limited parking. They are also are advised of heightened security and share ownership procedures, in the wake of the terrorist attacks on the US last year.

For his part, Walter Hewlett made further filings detailing the latest advertisements he has taken out against the merger. He also detailed research
by Ziff Davis Market Experts which suggests most HP and Compaq customers do not agree with management on the merger, and that the combined firm's customer base
could be prey to other vendors in the wake of the merger.

© ComputerWire.com. All rights reserved.

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