ISS backs HP-Compaq merger
Dissident Walter Hewlett says proxy advisory firm predisposed to management.
March 5, 2002: 4:36 p.m. ET
By Luisa Beltran
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NEW YORK (CNN/Money) - Institutional Shareholder Services issued an opinion late Tuesday backing Hewlett-Packard Co.'s $22 billion takeover of Compaq Computer Corp.
The opinion of ISS, which advises large money managers on how to vote their shares, is crucial because its clients control about 23 percent of HP's outstanding shares.
Rockville, Md.-based ISS said management's plans for the combination are achievable, company Vice President Pat McGurn told a news conference Tuesday.
The merger has faced stiff opposition since it was announced last September. Dissident director Walter Hewlett, son of one of the HP co-founders, has launched a bitter proxy campaign against the merger and has taken part in a heated exchange with HP directors and CEO Carly Fiorina.
Hewlett's efforts actually may help the transaction succeed, ISS said, because they have forced HP and Compaq management to take steps, particularly on integration risks of the merger, that mitigate certain dangers.
"We believe that the Compaq merger provides a better means of maximizing long-term value by exploiting the potential of all of HP's assets rather than just for a single 'crown jewel,'" ISS said.
Fiorina and Compaq Chairman and CEO Michael Capellas said Tuesday the ISS recommendation is a milestone for the merger as momentum builds to the March 19 date when HP shareholders will vote. Compaq holders vote the next day.
"Every vote is important, and we urge HP shareowners to cast their votes today," Fiorina said.
A negative opinion from ISS could have killed HP's chances. But influential analyst Andy Neff of Bear Stearns said the positive opinion from ISS doesn't necessarily mean HP will succeed in its merger with Compaq.
"This clearly removes what could have been an insurmountable hurdle -- but the battle will go down to the wire," Neff said.
Shares of HP (HWP: down $0.42 to $20.18, Research, Estimates), which closed at $20.60 Tuesday, dropped to $20.05 in after-hours trading while Compaq (CPQ: up $0.40 to $10.98, Research, Estimates), which ended Tuesday at $10.58, rose to $11.11.
A battle set for March 19
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.
Hewlett said late Tuesday that ISS has a clear predisposition to support management and that the proxy advisory firm assumes that boards "do the right thing."
"We believe ISS has missed the point -- we believe that the HP/Compaq merger will destroy stockholder value," Hewlett said. "It has been widely reported and many clients of ISS have told us they are independently evaluating the financial and strategic implications of the transaction, and we believe they will vote their HP shares against the merger based on the lack of merits of the proposed transaction."
ISS said it met numerous times with many who oppose the merger, including Hewlett and former HP chairman Lou Platt, who is a member of the Packard Foundation, McGurn of ISS told CNNfn.
The recommendation of HP's former chairman did have some weight, McGurn said. But "Platt hasn't been [at HP] for a while. He hasn't been able to look at the possible synergies from this combination," he added.
The proxy advisory firm also held various meetings with Fiorina and Capellas as well as HP's financial advisor, Goldman Sachs.
"It appears that [HP and Compaq] management has done everything it can to maximize the chance that integration will be a success," ISS said.
Even Platt and the Packard Foundation have admitted that management's integration plan is "good" and "better than anything they've seen," ISS said.
ISS also discounted an alternative plan offered by dissident Hewlett, who wanted to spin off HP's imaging and printing unit in the near future. Since there is no obvious buyer of the I&P unit, HP shareholders would realize the benefit of a separate unit but reap very little from the remainder of their HP investment, ISS said.
Hewlett's efforts to block the merger also could bode well for the companies if they do unite. "Mr. Hewlett's campaign will have generated enormous pressure for the combined company to perform—and this can only be good for HP shareholders," ISS said. 
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