Institutional Shareholder Services' verdict on the proposed purchase of Compaq by Hewlett-Packard could swing the outcome in a shareholder vote. Its recommendation and report on the proposed deal will be sent to several hundred institutional clients, such as pension and mutual fund managers.
In the advisory ISS was upbeat, concluding that HP's management team was offering reasonable projections about the acquisition's impact on the company. Both HP's anticipated cost synergies and revenue losses seem realistic, ISS said, citing HP's "generally strong performance" in its last fiscal quarter.
It did, however, point out some issues with the merger. "We share Mr. Hewlett's belief that integration is one of the most daunting problems facing a combined HP-Compaq," ISS wrote. "This is a task, however, that management by all appearances has tackled with relish."
ISS cited the detailed integration roadmap explained at meetings between itself and the top executives involved in the companies' integration planning.
"Management's integration plan makes clear that Ms Fiorina and Mr Capellas have taken the lessons of DEC and other failed tech acquisitions to heart," ISS said. "HP and Compaq also appear to have done pioneering work in thinking about and planning the 'cultural integration' of the two companies. It is hard to remain unimpressed in the face of such enthusiastic attention paid to the integration effort."
ISS dismissed Walter Hewlett's charges that HP's board did not thoroughly consider alternatives to acquiring Compaq. Hewlett, a member of HP's board, is leading the fight to defeat the acquisition. ISS' discussions with other board members provide "ample evidence" that the process of corporate governance leading to the deal's approval was sound, the firm said.
Institutions own about 57% of HP's shares. With 18% 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.
Research firm Sanford C. Bernstein & Co estimates that the acquisition's chances of approval by shareholders rises to "50% or more" with ISS' endorsement of the deal.
Twenty-three percent 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% 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.
This was first published in March 2002