News > Deals
ISS could kill HP-Compaq
Little known proxy advisory firm to issue opinion Tuesday on $22B HP-Compaq merger.
March 4, 2002: 4:02 p.m. ET
By Staff Writer Luisa Beltran

graphic NEW YORK (CNN/Money) - A little known but very influential proxy advisory firm could kill Hewlett-Packard Co.'s chances to succeed in its $22 billion takeover of Compaq Computer Corp. when it issues its recommendation Tuesday.

Rockville, Md.-based Institutional Shareholder Services, which advises money managers on how to vote their shares, will release its opinion after the market closes.

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ISS's recommendation is "crucial" since it will influence the institutional shareholders, who control 23 percent of HP's shares, HP Chief Financial Officer Bob Wayman said last week at an analyst conference.

ISS has held discussions with the management of both HP and Compaq and dissident Walter Hewlett, son of one of the HP co-founders, who has launched a bitter proxy battle against the merger.

"Whichever way (ISS) votes, that will be the way the deal goes," said analyst Dan Niles of Lehman Brothers.

Carly Fiorina
Hewlett-Packard Co. Chairman and CEO
ISS provides analysis and consulting services to 950 institutional and corporate clients throughout the world. ISS, once a unit of Thomson Financial, acquired rival Proxy Monitor last year.

"ISS is the only place to go now for independent proxy advice," said Tom Burnett, president of Merger Insight.

The firm typically advises on board governance issues and is rarely involved in merger spats, Burnett said.

ISS typically sides with management, but when confronted with contested situations the firm's track record is split, said company spokesman Pat McGurn.

Barclays turns to ISS

Another sign of ISS's influence came Monday. Barclays Global Investors, the largest institutional investment manager in the world and a top HP shareholder, has given the proxy advisory firm the authority to vote its nearly 60 million shares, spokesman Tom Taggart said.

Barclays outsourced the vote to ISS because of a potential conflict of interest. Barclays CEO Patricia Dunn is a director on HP's board, Taggart said.

"We provided ISS the authority to vote the shares," he said. "We have no influence on how they are going to vote those."

HP has 1.94 billion shares outstanding.

Shares of Hewlett-Packard (HWP: up $0.42 to $20.55, Research, Estimates) surged more than 3 percent Monday in afternoon trading while Compaq (CPQ: up $0.24 to $10.65, Research, Estimates) rose marginally.

The odds

An ISS opinion against the transaction could destroy HP's chances to complete the merger, which has faced considerable opposition since it was announced last September.

Already, 18 percent of the HP shares are set to be voted against the merger. In early December, a key shareholder, the David and Lucille Packard Foundation, made a preliminary decision to oppose the deal. The Packard Foundation holds more than 10 percent of HP's shares. Other heirs of the founding Hewlett and Packard families also oppose the merger. Combined, the Packard Foundation and the heirs hold roughly 18 percent of HP's shares.

Since 23 percent of HP's shares are under ISS's influence, a 41 percent block could be voted against the Compaq merger if the firm opposes it.

"Mathematically, if ISS were to recommend against [the merger], it could present an insurmountable challenge to the deal," said influential analyst Andy Neff of Bear Stearns.

HP shareholders are set to vote March 19 and the company needs a majority, or 51 percent, of the total votes cast for the merger to be approved. Analysts have said HP's takeover of Compaq needs the approval of 67 percent of institutional stockholders.

Institutions typically vote in line with ISS's recommendation and many will still adhere to the proxy advisory firm's opinion when March 19 rolls around, analysts said.

"If ISS comes out against [the merger], not all but many will follow," said analyst Charles Wolf of Needham & Co. "Then 35 to 38 percent are against the deal just off the bat."

An ISS recommendation opposing the merger drops the odds HP will succeed to about 20 percent to 25 percent. But a recommendation for the transaction doesn't make the merger a sure thing for HP management and raises the chances of it succeeding to only about 55 percent to 60 percent, Wolf said.

Some shareholders will still look to make their own decisions since the HP-Compaq deal is very high profile, said Merger Insight's Burnett.

"Never say never," Bear Stearns' Neff said. "I don't think we will know until we know."

ISS history

ISS sided with dissident Weyerhaeuser Co. in its protracted bid to acquire Willamette Industries Inc. last year. The proxy advisory firm recommended that shareholders vote with Weyerhaeuser (WY: up $3.02 to $65.25, Research, Estimates) in its May 2001 attempt to secure three seats on Willamette's board.

Weyerhaeuser eventually obtained the seats, but the company didn't win the fight for Willamette (WLL: up $0.02 to $55.49, Research, Estimates) until early this year.

ISS played a role in Texas billionaire Sam Wyly's attempt to gain four seats on the board of Computer Associates last year. The proxy advisory firm sided with Wyly in his unsuccessful bid to secure partial control of CA's (CA: up $0.05 to $16.95, Research, Estimates) board.

ISS also sided with dissident Tito Tettamanti, a Swiss investor, in his attempt to gain partial control of ICN Pharmaceutical's board last year. Tettamanti and an investment group successfully gained one-third of ICN's (ICN: up $0.57 to $28.23, Research, Estimates) board.

ISS's influence on the deal is hard to know right now. A negative opinion from ISS could minimize HP's chances but a positive recommendation for management doesn't mean the computer maker will succeed, analysts said.

On March 19, stockholders will decide the merger's fate and HP shareholders don't necessarily follow management, said Merger Insight's Burnett.

When Chairman Carly Fiorina ran for re-election to HP's board in February 2001, about 8 percent, or 136 million shares, were withheld, which is synonymous with a "no" vote.

"They are a very independent lot these Hewlett shareholders," Burnett said. "They don't do what you want them to." graphic


Willamette hangs tough - Aug. 16, 2001

Computer Associates battle comes to a head - Aug. 29, 2001

FTC ruling on HP-Compaq next week - Feb. 28, 2002


Institutional Shareholder Services