The favorable recommendation by Institutional Shareholder Services bodes well for security giant Symantec, which has felt the sting of investor wrath since announcing the deal late last year and has seen a third of its market value vanish.
The ISS approval offsets a recommendation Glass, Lewis & Co. issued late Thursday against the merger. Advisory service companies like ISS and Glass, Lewis provide guidance to institutional investors--such as mutual funds, index funds and pension funds--on how to vote their shares on issues that come up for a shareholder vote.
Symantec and Veritas will ask their respective investors to vote on the merger, valued at $13.5 billion, on June 24. Symantec is largely owned by institutional investors, which make up more than 90 percent of its shareholder base.
In explaining its support for the merger, ISS said that "while ISS believes that shareholders are right to be cautious given the history of large technology transactions failing to deliver on promises, we believe that the underlying strategic merits behind this transaction are strong."
It added: "While we are often skeptical about relying on long-term promises to justify accepting short-term risk, we believe that the long-term strategic basis for this transaction has merits and should provide the best long-term prospects for the company and ultimately its shareholders."
ISS said the sharp decline in Symantec's share price was the result of the market's outlook for the sector, rather than a specific dislike of the Veritas deal. ISS noted that investors believe the security sector's long-term prospects reflected slow growth, and, as a result, also bid down competitor McAfee's stock price.
However, ISS cautioned that "the companies have not quantified the revenue or market share opportunities that this long-term strategy presents, which means that shareholders are being asked to make a leap of faith and trust the vision of management."
In objecting to the merger, Glass, Lewis cited a number of issues, ranging from the limits on Symantec's growth potential to the challenges tech companies face in successfully executing on mergers.
"In our view, this merger is destructive to shareholder value," said Greg Taxin, chief executive of Glass, Lewis. He added that a third of Symantec's shares are held by clients of Glass, Lewis.
Symantec representatives declined to comment on the recommendations.
While the recommendations by ISS and Glass, Lewis are by no means a surefire indication of how institutional investors will vote on a merger, they do carry great weight, especially among the index funds and institutional investors that have a small position in a stock.
Institutional investors use the recommendations as part of their analysis on determining how they will vote on shareholder matters, said Tom Ball, senior managing director at Morrow & Co., a New York-based proxy solicitor.
But index funds, which usually do not conduct their own independent research in-house, often rely solely on the recommendations of proxy solicitation firms like ISS, Ball said.
"They don't have the personnel to analyze deals, so it's safe to say index funds will follow recommendations," Ball said. "That's because the index funds do not sell stocks in their portfolio until there are changes made to the index."
And large institutional investors, such as Fidelity Management & Research and The Vanguard Group, may follow the recommendations of such investor advisory services if they hold only a small stake in a company.
"If an institution's position in a company is so many it barely registers on their screen, they won't want to spend the man-hours to analyze an issue, and go with ISS's recommendation," said Rick Grubaugh, a senior vice president at proxy solicitation firm D.F. King & Co.
When ISS issues a "no" recommendation, or advises clients to withhold votes on the re-election of a director, proxy solicitors say 30 percent to 60 percent of the shares voted often follow that guidance.
Glass Lewis, meanwhile, is generally thought to influence 2 percent to 10 percent of shares voted by institutional investors, proxy solicitors said.
Since last December, when Symantec, the security giant's stock has tumbled by roughly a third, closing at $ 21.28 a share on Friday. John Thompson, Symantec's chief executive, and Gary Bloom, Veritas's chief executive, have and in meetings with institutional investors.
Some investors have raised concerns about how the fast-growing security company would perform if it saddled itself with a slow-growth storage company. Thompson, however, has championed the deal, noting the merger will take advantage of IT customers' ever growing need for storage and a desire to keep that information and data secure from malicious attacks.
Thompson has also pointed to revenue potential of regulatory requirements, such as the Sarbanes-Oxley Act, that require companies to audit who is accessing their information and the need to keep that information safe.