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SACRAMENTO – Two of California’s richest and most venerable family foundations face profound questions as the deal they most feared may come to pass: the merger of Hewlett-Packard Co. and Compaq Computer Corp. 

As the computer giants envision complications of melding their corporate cultures, the wealthy, but shaken William and Flora Hewlett and David and Lucile Packard family foundations also face uncertain futures. 

“What they’re going to do with all that stock, I don’t know,” says Charles Elson, who heads the Center for Corporate Governance at the University of Delaware. “They’ve got so much stock in this thing.” 

Already, a Bay Area high-tech meltdown and two years of tumbling Hewlett-Packard stock values have cost the foundations dearly and invited second guessing among investment analysts. 

Billions more dollars may be at stake if the Palo Alto-based giant suffers further, as the foundations have long speculated, from a possible merger marred by divisions and employee resistance. 

“If half your shareholders think you’re doing the wrong thing and two-thirds of your employees think you’re doing the wrong thing, this is, I think a disaster for them,” Elson says. 

The Hewlett and Packard family foundations, spun from the firm’s legendary rise from garage operation to global business, mounted an extraordinary campaign to derail their parent company’s $21 billion acquisition of Texas-based Compaq. With credibility of owning 12 percent of company stock, family foundations more accustomed to giving away millions every year instead led an apparently unsuccessful insurgency against HP chief Carly Fiorina. 

Among those watching most anxiously are hundreds of Hewlett and Packard foundation beneficiaries, including those touting some of California’s most innovative ideas about growth and urban development. 

“It’s unfortunate,” said Steven Bodzin, spokesman for San Francisco’s Congress for New Urbanism. “We’ve been feeling the general downturn in foundation giving.” The CNU, which advocates compact growth patterns and downtown urbanism to curb suburban sprawl, has received $600,000 from the foundations. 

The Hewlett and Packard foundations rank as California giants, the new-money powerhouses of a statewide philanthropy second only to New York for giving. The Packard Foundation recently contributed $175 million to save California farm and forest landscapes. In 2001, both foundations combined $13 million to help build a new University of California campus in Merced. 

As HP’s Fiorina claims victory and dissident company director Walter Hewlett refuses to concede defeat, the Packard Foundation is declining comment on its next move. 

“Our position is we voted our shares against it and that’s where it stands,” says Packard spokeswoman Sarah Durant. 

But investment experts say Packard Foundation options must include diversifying the foundation away from company stock. The foundation, almost entirely invested in Hewlett-Packard, has seen its $13 billion asset base dwindle by half since 1999. This year, it cut its grant-making budget to $250 million, down from $450 million in 2001. In 2000 before HP’s stock slide began, it contributed $614 million to causes from land conservation to the arts and sciences. 

“I think with all the attention they’ve gotten and what turns out to be the unpopular stance they took, they may very well reconsider their investment strategies,” said Clay Singleton, vice president of Ibbottson Associates, a Chicago-based investment research firm. 

Singleton cautions it would have to sell “slow and deliberate,” lest it unleash a selling spree doing still more damage to HP earnings and foundation assets. 

Likewise, Elson says, “If they start to sell the downward pressure on the stock will be immense.” 

Elson says the Packard Foundation may have to “play along and try to make it work” if Fiorina’s merger prevails. 

“With the size of their stock, maybe they’ve got no choice,” he says. 

By most accounts, the Hewlett Foundation has already diversified its investment portfolio, following a tradition honed by most foundations spun from corporate giants. In 1999, the foundation contributed $134 million to causes from the environment to the performing arts to Latin American relations. 

Hewlett officials did not return telephone calls. But analysts say a recent bequest by founder William Hewlett has pushed its endowment up to about $6 billion. Hewlett died in 2001, five years after Packard. 

By law, foundations give away 5 percent of their assets yearly. 

The New York-based Foundation Center, an information clearinghouse on American philanthropy, lists the Packard Foundation among a handful of foundations with most of their investments in parent company stock. Others include the Robert Woodruff Foundation, Lilly Endowment, Robert Wood Johnson Foundation and Kellogg Foundation. 

Officials of the Kresge Foundation, founded by the corporate predecessor to Kmart, say it sold all its company stock during the 1980s. Though Kmart recently filed for Chapter 11 bankruptcy protection and closed 280 stores, the foundation’s $2.4 billion is unaffected. 

“Reducing the volatility of the endowment speaks to good stewardship of resources and fiduciary responsibility on the part of the board,” says Sandra Ambrozy, Kresge’s senior program officer. 

Major recipients of Packard Foundation funding: 

• University of California, $11 million, to buy Merced campus site. 

• Sierra Business Council, Truckee, $6.8 million to conserve land in Sierra Nevada. 

• Great Valley Center, Modesto, $5.7 million to save farmland. 

• Envision Utah, Salt Lake City, $3 million for 20-year growth plan. 

• Congress for New Urbanism, San Francisco, $300,000 to promote urban neighborhoods. 

Major recipients of Hewlett Foundation funding: 

• University of California, $2 million to help develop UC Merced. 

• Stanford University, Palo Alto, $1.5 million for environmental research initiative. 

• Greenbelt Alliance, San Francisco, $400,000 to save open space. 

• Planning and Conservation League, Sacramento, $300,000 for statewide environmental dialogue.