Institutions Say ISS Won't Dictate H-P/Compaq Merger Vote
By: Riva Richmond, Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones) In a close contest, every vote matters. Still, people who can swing many votes matter more, and they are closely watched and lavishly courted.
Such has been the treatment enjoyed by proxy-advisory firm Institutional Shareholder Services, or ISS, which has been widely wooed by partisans campaigning for the votes of Hewlett-Packard Co . (HWP) and Compaq Computer (NYSE: CPQ - news) Corp. (CPQ) shareholders, who will vote next month on
the companies' hotly contested merger plan.
Late this week or early next week, ISS will provide a pair of reports with vote recommendations to its clients, about 750 large institutions, many of whom hold one or both of the securities, said Patrick S. McGurn, ISS' vice president.
But the firm's influence over the merger's fate may not be as strong as many have assumed.
In a typical shareholder vote, ISS is widely believed to determine which way 10% to 15% of the vote goes. But institutional investors, and even ISS itself, say the firm has less sway in contests like this one, where the debate centers on business or financial questions and where big investments in big, important companies are at stake.
ISS' views are weighty on "less visible" or routine matters, like stock-option plans, said Ken Bertsch, director of corporate governance for TIAA-CREF, the New York -based teachers retirement fund. "Their strong suit is corporate governance, and this (decision) is more about what, from a business standpoint, makes sense for H-P and Compaq."
The companies' management teams argue that joining together is an important strategic step in an age of hardware consolidation. But H-P's founding families, who together control 18% of the stock, have been fighting the deal and advocating a "focus and execute strategy" at H-P.
Bertsch said TIAA-CREF will read the ISS reports for the substantive research, but won't be giving much weight to the recommendations. It holds about 12.4 million H-P shares and 14 million Compaq shares. ISS isn't issuing a report tailored to holders of both stocks, so TIAA-CREF will, in any case, have to reconcile potentially conflicting advice itself.
Because investors pay for ISS' advice, the conventional wisdom is they will take it, absent a strong case for not doing so. Vinnie Muscolino, managing director of David L. Babson & Co , and the H-P/Compaq decision maker at the firm, said, if he goes against ISS' advice, he typically documents why. In this case, Muscolino, who is leaning in favor of voting his firm's more than half million H-P shares and 270,000 Compaq shares in favor of the merger, isn't particularly interested in ISS' views. He's more keen on reading the tea leaves at an H-P analyst meeting Wednesday.
In fact, all institutional investors interviewed for this article said they will make their own decisions. With business strategy at the core of the matter, they feel the terrain is more appropriately theirs.
As Victory Capital Management analyst Marty Shagrin pointed out, equity analysts and money managers judge business strategies and assess growth and profit potential every day. "If I can't make the decision, then what's the purpose of my job?" he said. Victory owns about 6.9 million H-P shares and a small Compaq position and is leaning against the merger.
Barry Goggins, an analyst at Babson, agreed: "On a merger, it's the analyst and portfolio managers that run through the decision making." He was involved in Babson's vote for a slate of directors successfully nominated by Weyerhaeuser Co . (WY), and backed by ISS, to Willamette Industries Inc.'s (WLL) board, as part of Weyerhaeuser's hostile takeover of the company. That vote reflected concerns about both shareholder rights and business direction; Willamette's board was widely seen as an obstacle to a buyout in the best interest of its shareholders.
McGurn concedes ISS may have less influence on this vote than on others, but argues investors want to hear its analysis and make it part of their decision- making process.
Its H-P recommendation will, at minimum, decide the vote for Barclays (NYSE: BCS - news) Global Investors' 58.5 million H-P shares, about 3.4% of the outstanding stock. Barclays turned over its decision to ISS to avoid any appearance of conflict of interest because its chief executive, Patricia Dunn, is a member of H-P's board. Its move may make ISS more influential in this merger compared to some others, Bertsch said.
As for the rest of the voters, ISS is thought to have the most influence over index funds, which do less of their own fundamental research. According to a Thomson Financial/Carson list of H-P's top 50 institutional holders, index funds, excluding Barclays , hold about 7.7% of the stock.
ISS' clients, index funds or not, generally keep discretion over their vote, said McGurn, and "the more likely the voting item is going to have a direct impact on the value of their investment, the more likely they are to go through and do their own analysis." Investors are also more apt to take matters into their own hands in "one-off" items, like a merger vote, than more routine matters of corporate governance, ISS' longtime mandate.
ISS was founded in 1985 as rampant corporate raiding pushed money managers to focus on corporate governance issues. Last year, ISS became a near monopoly in its field when it merged with rival Proxy Monitor.
A number of ISS staff members are alumni of the Investor Responsibility Research Center, or IRRC, including McGurn and Jamie Heard, formerly of Proxy Monitor and now chief executive of ISS. IRRC, which provides research to about 500 institutions and is ISS' only real competition, will issue a report early next week on the H-P-Compaq merger proposal. As a matter of policy, it won't a provide vote recommendation.
IRRC, founded in the early 1970s, traces its roots to educational institutions and foundations' effort to deal with social-policy issues related to their investment decisions, amid pressure to divest holdings in South African companies during the apartheid era. The group helped spawn a broader shareholder-rights movement, of which ISS is part. As such, the field is heavily weighted in professionals with backgrounds in law and politics.
ISS also has staff with expertise in finance. Still, the lead ISS analyst on the H-P-Compaq deal is 32-year-old lawyer Ram Kumar, and a perceived deficiency in finance expertise at the firm has led some to question its ability to adequately analyze the H-P-Compaq merger proposal.
"In contests concerning mergers and similar business and financial issues, it might be more practical for ISS to simply recommend their clients seek relevant expertise from people outside the area of corporate governance," said Gary Lutin, president of Lutin & Co ., a former investment banker and an adviser to institutional shareholders and boards on corporate control and governance issues. Experts might include people with experience managing technology businesses or observing them from the boardroom, he said.
"Over the last couple of years clients have been coming to us and saying we want you to take a broader look," particularly at integration risks, McGurn said. The H-P/Compaq merger debate, "is all about the ability of the companies to execute on this deal," and ISS' report will discuss issues like the role of management and integration controls and processes.
But the real value ISS offers clients is its unique position as an independent third party with resources and influence beyond that of most individual institutional investors, he said. Not only can ISS dedicate more time and effort to studying the deal, "we get levels of access that typical investors would not get," McGurn said. "Companies will answer our questions," and all the players, including outside directors, will discuss their views and provide valuable information.
Few people are willing to predict how ISS will come down on the deal. But another predicted ISS will make the politically astute choice and come out in favor of the deal. "That is the safe route," the source said. "No one can say for sure which (position) is the best.... (but) if the merger fails, Carly Fiorina and a lot of other executives will leave. Then where will the company be?"
-By Riva Richmond , Dow Jones Newswires, 201-938-5670
riva.richmond@dowjones.com
(This story was originally published by Dow Jones Newswires) |
