Stock Watch: Sealed With A K-ISS05 Mar 20:15 By Monica Rivituso
Of SMARTMONEY.COM
BREAKING UP MAY be hard to do, as the song goes. But getting together can be
even harder. Hewlett-Packard's (HWP) controversial bid to buy Compaq Computer
(CPQ) has been, by turns, part proxy battle, part family saga, part soapopera.
H-P's efforts to convince shareholders that the combination is strategically
sound have been met with bitter criticism from a dissident board member and
son of a company founder, threats of legal action and considerable confusion on
the part of institutional investors. But the two companies have just moved a
big step closer to wedlock after their merger received a key vote of confidence
Tuesday after the close.
The favorable recommendation came from Institutional Shareholder Services, an
independent firm that provides recommendations to 750 large institutional
clients on how to vote their shares. ISS weighs in on everything from
directors' elections to stock plans to merger proposals (although mergers only
comprise less than 5% of the firm's overall work). With the mountains of
information (much of it conflicting) that have emerged since this $25 billion
merger was announced Sept. 3, ISS's decision has been considered crucial to
providing some clarity - and was even seen as the key to whether the merger can
succeed at all.
In the end, ISS gave the stamp of approval to the H-P/Compaq merger proposal.
"Based on our assessment of the strategic and financial prospects of the
combined company and our analysis of the integration plan and other procedural
aspects of the merger, we recommend that shareholders vote for the H-P-Compaq
combination," ISS said in its report. H-P shares, which ended the day up
fractionally in heavy volume, fell 3% in after-hours trading, while Compaq
shares, which fell slightly in heavy volume during regular trading hours, rose
4% after the close.
After meeting with proponents andcritics of the merger proposal, ISS said it
examined the strategic rationale for combining the country's second- and
third-largest computer-hardware makers. It also weighed the projected benefits
of the merger against the risks associated with failure. ISS also noted that it
analyzes merger transactions from a longer-term perspective.
In a 25-page report, ISS determined that management offered reasonable
predictions for both the costs that would be cut and the revenues that would
be gained from a merger. As for the challenge of integrating these two giants
- an area that's been a concern - ISS said that managements of both H-P and
Compaq have taken the lessons of past failure to heart (Compaq's 1998
acquisition of DEC is widely considered a disaster): "It is hard to remain
unimpressed in the face of such enthusiastic attention paid to the integration
effort."
ISS largely dismissed the back-and-forth allegations and name-calling from
both proponents and critics of the merger. It did, however, question why
management hadn't revealed early negotiations over compensation packages for
H-P Chief Executive Carly Fiorina and Compaq CEO Michael Capellas. While those
compensation packages, totaling $115 million, were never executed, dissident
H-P director Walter Hewlett, son of the late co-founder William Hewlett and the
most vocal opponent of the deal, recently raised them as a conflict of interest
for the merger's backers.
Still, ISS determined that Hewlett's alternative proposal to focus on the
company's imaging and printing business, and possibly spin it off, is a less
attractive proposal than merging H-P with Compaq. Hewlett's idea might be more
attractive in the short term, but in the long term, ISS said, "the Compaq
merger provides a better means of maximizing long-term value by exploiting the
potential of all of H-P's assets rather than just a single 'crown jewel.'"
ISS might have just given the computer-hardware couple a big nudge down the
aisle,but there aren't rings on any fingers just yet. The merger still faces
opposition. Hewlett and the families and family foundations of the two
co-founders have said they plan to vote their approximately 18% stake against
the plan. With that many shares stacked against the merger out of the gate,
industry watchers say H-P and Compaq still have some work ahead of them before
their shareholders vote on the merger on March 19 and 20, respectively. Still,
while ISS's approval might not necessarily seal the deal on its own, it
certainly makes it more of a horse race, says Tom Burnett, president of Merger
Insight, which provides independent research and analysis on mergers and
acquisitions.
How much influence will ISS exert in large institutions' decision making?
Hard to say. Many think the recommendation will go a long way toward helping
H-P and Compaq's case. Barclays Global Investors, which owns 3.1% of H-P's
shares, has already decided to vote its stake according to ISS's
recommendation. That's to avoid a conflict of interest, since Barclays's chief
executive, Patricia Dunn, is a member of H-P's board. For institutions that
haven't decided how they'll vote their shares, ISS's recommendation could carry
quite a bit of weight, says Joseph Beaulieu, an analyst at Morningstar who
covers both H-P and Compaq. "I think that ISS's call on this will probably be
pretty influential given the he-said-she-said thing that's going on between
Walter Hewlett and Carly Fiorina," he says. "I could see investors not knowing
what side to believe."
Then again, Timothy Ghriskey, president of Ghriskey Capital Partners, says
large institutions still display a fair amount of independence in deciding how
to vote their shares. At firms where he's worked, the portfolio manager was
always responsible for the final decision. Ghriskey doesn't use ISS's services,
nor does he hold shares of H-P or Compaq. Betting that the market's response to
the proposal would weigh on the stocks, he unloaded them after the companies
announced their merger plans. He was right: H-P and Compaq shares fell 18% and
10%, respectively, on Sept. 4, the first trading day after the announcement,
and are still down a respective 11.2% and 14.3% from their preannouncement
levels.
ISS's recommendation is certainly a big psychological boost for the merger.
Now, H-P and Compaq are rounding the home stretch in their race to convince
shareholders of the proposal's merits - and they have two more weeks to seal
the deal.
For more information and analysis of companies and mutual funds, visit
SmartMoney.com at smartmoney.com. (END) DOW JONES NEWS 03-05-02
08:15 PM |
