FEATURE-Obscure firm takes spotlight in HP-Compaq deal
By Tom Johnson
NEW YORK, March 4 (Reuters) - Ram Kumar went about his life in obscurity until a few months ago. These days, the analyst is at the center of a firestorm, holding in his hands what many believe is the future of the bitterly contested merger between Hewlett-Packard (NYSE:HWP - news) and Compaq Computer (NYSE:CPQ - news).
``We're keeping him in a locked room and slipping food under the door,'' joked Pat McGurn, director of corporate programs at Institutional Shareholder Services, where Kumar, 32, works as a senior analyst.
ISS, the only independent U.S. firm providing investors with advice on merger and shareholder contests, is expected to advise shareholders by Tuesday evening on whether they should support the $22 billion computer merger.
About 20 percent of Hewlett-Packard's shares already are lined up against the deal, including those of Hewlett's founding families, the Walter Hewlett and the Packard Foundations. A negative ISS recommendation is likely to kill the deal because it would influence enough institutional investors to vote against it.
The situation has reminded U.S. dealmakers about what a powerful force ISS has become in the merger industry. But it also has raised some difficult questions.
Many question why ISS analysts, some of whom have little corporate and legal experience, should have the power to scuttle deals cobbled together by corporate titans. Other critics worry ISS can abuse its position.
``It's not a totally monolithic system that ISS has, but it certainly is powerful,'' said Carolyn Kay Brancato, director of the Global Corporate Governance Research Center. ``The question is: Are they making decisions that the beneficiaries of the fund(s) want them to?''
Sound Advice
ISS doesn't want the responsibility, and prefers that clients use its recommendations as a tool in forming a decision.
``Particularly in a high-profile situation like this, our clients are more likely to use our recommendation as a piece of input,'' said Jamie Heard, ISS's chief executive officer. ``Many will be doing their own analysis and making an independent decision on their own, certainly using ISS as a resource.''
ISS was founded in 1985, after the U.S. government passed new rules requiring large investors to become more involved in companies where they had holdings. The idea was to give shareholders an interest in ensuring that companies became good corporate citizens.
Two legendary corporate governance advocates, Nell Minow and Bob Monks, founded ISS to help investors who didn't have the resources to do their own research. Minow and Monks are no longer affiliated with the firm, but their brainchild has cornered the market when it comes to giving voting advice.
Today, ISS has about 950 institutional and corporate clients worldwide, and issues voting recommendations for more than 20,000 shareholder meetings worldwide.
A Step Too Far?
Along the way, ISS broadened its product line to include a variety of services, including voting clients' shares as well. Such services have drawn the ire of critics, who claim the group should create a barrier between advising clients and voting shares for them.
``For some corporations, there is sort of an air of a racket to it,'' said one consultant, who asked not to be named because his firm appears often before ISS. ``They feel that unless they subscribe to ISS, rightly or wrongly, there's a risk that analysts might not rate them as highly as they should when their deal comes up.''
Many experts dispute the notion that ISS is anything but impartial, however.
``I think that the clout they have is as a result of hard-won respect with their clientele,'' said Gregg Jarrell, an economics and finance professor at the University of Rochester's William E. Simon Business School and former U.S. Securities and Exchange Commission chief economist.
``They've been there for many years and have given advice that, in retrospect, has been correct,'' Jarrell said.
ISS's co-founder Monks jokingly contends that if anyone can complain about ISS's lack of bias, it should be him. Since he founded Lens Inc. -- an activist investment fund -- with Minow in 1992, Monks has had three proxy fights before ISS, and only won one.
``ISS basically is the incarnation of modern trust practice in America,'' Monks said. ``The thing that makes them look so strange is nobody else does it.''
Closely held Proxy Monitor offered a competing service until last year, when it bought ISS from Canada's Thomson Corp. (Toronto:TOC.TO - news). But so far, no other organization has filled the void.
``Among the most conspicuous absentees are people that teach ethics, like Harvard and Yale, and people who give grants for worthwhile purposes, like the Ford foundation,'' Monks said. ``There is nothing standing in the way of any of those great institutions from applying some of their in-house ethical superiority to providing a voting alternative.''
INEXPERIENCE
Another frequent complaint about ISS is that its analysts are not qualified to decide the fate of corporate marriages.
In his ISS career, Kumar, a lawyer by training, already has been involved in several tough calls, including recommending that Wachovia Corp.(NYSE:WB - news) shareholders favor a merger with First Union instead of backing a richer bid from SunTrust Banks Inc. (NYSE:STI - news) last year.
Even so, some question whether he should have the power to overrule the Hewlett and Compaq boards -- which contain corporate heavyweights such as Thomas Perkins, general partner of Kleiner, Perkins, Caufield & Byers, and Boeing Co (NYSE:BA - news). Chairman Philip Condit.
Kumar has been incommunicado recently as the deadline for ISS's recommendation on the Hewlett-Compaq merger contest loomed. He didn't return several phone calls seeking comment.
The good news is, ISS analysts like Kumar these days have help from others -- increasing the expertise that goes into pivotal decisions. Six or seven other ISS analysts will help make the Hewlett-Compaq decision, whereas a single analyst would have handled the process in the past.
``Given the obvious importance of these issues that we're deciding, we've definitely moved to a more collegial style of coming up with decisions,'' McGurn said. ``You've got people that are going to bring different expertise to the mix, so we're now able to come out with a better product at the end of the day.''
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