Key advisor endorses HP-Compaq merger

Institutional investor advisory firm Institutional Shareholder Services Inc. (ISS) is recommending a vote for Hewlett-Packard Co.’s (HP) planned acquisition of Compaq Computer Corp., a verdict that could swing the shareholder vote’s outcome.

ISS’ recommendation and report on the proposed deal will be sent to several hundred institutional clients, such as pension and mutual fund managers. Institutions own about 57 per cent of HP’s shares. With 18 per cent of HP’s shares controlled by the Hewlett and Packard families and their foundations, which have vocally opposed the acquisition, institutional support of the acquisition is critical if it is to pass.

Twenty-three per cent of HP shareholders subscribe to ISS, according to HP chief financial officer Bob Wayman. One of HP’s largest shareholders, Barclays Bank PLC, has said it will vote its 3.1 per cent stake in accordance with ISS’ recommendation. Barclays ceded the voting decision to avoid a conflict of interest. One of its top executives, Patricia Dunn, global chief executive of Barclays Global Investors, sits on HP’s board.

The Compaq/HP deal is the first major proxy, or shareholder, matter on which institutional investors will have only one advisor. ISS merged with its chief rival, Proxy Monitor Inc., in August. Proxy Monitor, the smaller of the two companies, bought ISS from its former parent company, Thomson Financial, with the help of outside investors. The merged company opted to retain ISS as its name.

Research firm Sanford C. Bernstein & Co. LLC estimates that the acquisition’s chances of approval by shareholders rises to “50 per cent or more” with ISS’ endorsement of the deal. Bernstein’s own research suggests that 12 per cent of HP’s shares will be voted in accordance with ISS’ recommendation, with another seven per cent of shares “influenced” by ISS’ verdict.

“A yeah vote could literally make the deal a horserace,” the firm wrote in its report.

On the IT industry’s last major proxy fight, Computer Associates International Inc. (CA) shareholder Sam Wyly’s bid to replace CA’s board of directors, ISS initially recommended that clients vote for CA’s incumbent directors. The firm noted, however, that it would support a proxy bid for minority representation on CA’s board, and several days after ISS issued its report, Wyly revised his proxy to seek replacement of only four of CA’s 10 directors. Both ISS and Proxy Monitor then switched their recommendations and backed Wyly’s slate of nominees. Wyly’s bid nonetheless ended unsuccessfully, with more than 75 per cent of CA’s shareholders voting to retain the current board.

Institutional Shareholder Services, located in Rockville, Md., is at

Hewlett-Packard, located in Palo Alto, Calif., is at

Compaq, in Houston, is at

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