Rockville, Md.-based Institutional Shareholder Services advises money managers how to vote on proxies and other corporate governing issues. Over the coming weeks, ISS will hear from HP and Compaq, as well as opponents of the deal, before releasing an opinion that may go a long way in determining whether the acquisition goes through.
In many cases, institutional investors simply vote their shares in line with the recommendation from ISS, which was formerly a unit of Thomson Financial but was recently sold and merged with Proxy Monitor. Given the magnitude of the HP-Compaq deal, more institutions than usual may make their own decisions and use ISS as only a guide. Regardless, the vast majority of such shareholders will receive the ISS opinion, making it critical for HP to win the support of the ISS analysts.
Backing from ISS became essential following the preliminary decision Friday by HP's largest shareholder, the David and Lucile Packard Foundation, to oppose the deal. The foundation only controls about 10 percent of HP's shares, but other family members and foundations are also opposed to the deal. David Packard, the Packard Humanities Institute, Walter Hewlett and two other Hewlett sisters, all of whom are against it, control another 8 percent of the shares. This brings total opposition to 18 percent.
Given the size of the "no" vote so far, analysts now say that HP must win the support of two-thirds of institutional investors, assuming that individual investors are roughly split on the merger.
"We view (approval) as highly unlikely, particularly in light of Walter Hewlett's intention to publicly solicit proxies," Banc of America Securities analyst Joel Wagonfeld said in a research note Monday. After the Packard Foundation's vote on Friday, Hewlett said that if HP forced a shareholder vote, he would solicit votes opposing the deal.
Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray, said in a report Monday that he expects ISS will come out against the deal, although he did not offer specific reasons why.
However, Ram Kumar, assistant director of U.S. research at ISS, said that ISS has yet to even schedule its meetings with company management or with opponents of the deal. Typically, ISS issues its recommendation about two weeks before a shareholder vote.
"We look forward to the opportunity to meet with them," HP spokeswoman Rebeca Robboy said Monday.
HP lobbied but failed to convince the Packard foundation, which unanimously voted Friday to oppose the merger.
The foundation's 12-member board includes three daughters of the HP co-founder, former HP chief executive Lewis Platt and former HP chief operating officer Dean Morton.
As Booz Allen & Hamilton laid out the pros and cons of the merger, the recommendations largely fell on the "no" side of the equation, said a source.
"(The foundation board) took advantage of the best advice (they) could get, he said.
HP has not scheduled a vote yet but has said it hopes to have one in time to close the deal in the first half of next year.
HP has been talking to institutional investors since the merger was announced. However, it will now clearly have to step up its efforts. One option would be to try to convince Compaq to reset the price of the deal, so that HP would own more of the combined company. Such a move could potentially convince the family foundations to change their minds and boost backing from other HP shareholders.
Toni Sacconaghi, an analyst at Sanford C. Bernstein, said in a research note Monday that he believes the value of Compaq's shares would have to be cut by 20 percent in order for those opposed to the deal to re-evaluate their position.
Robboy said HP would not speculate on such a possibility but added that "the merger we announced on Sept. 3 is the one we intend to bring to a shareholder vote."
Staff writer Dawn Kawamoto contributed to this report.