Hewlett-Packard Co.s bid to buy of Compaq Computer Corp. received its most significant endorsement to date today as an influential investment group urged its more than 700 corporate clients to support the $22 billion deal.
The recommendation of the Institutional Shareholder Service marks a dramatic victory for HP Chairman and CEO Carly Fiorina, who has staked her career on the success of the deal, and deals a strong rebuke to dissident HP board member Walter Hewlett, who has lobbied heavily against the merger.
"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 HP-Compaq combination," states a report released by the ISS, based in Rockville, Md.
The ISS recommendation was largely seen as a make or break vote for the merger, with HP management facing strong opposition from the heirs of the companys two late co-founders, who control more than 17 percent of the companys stock.
While only about 23 percent of HPs shareholders subscribe to ISS, the recommendation is expected to prove key in HPs efforts to persuade more than 50 percent of its shareholders to vote in favor of the deal on March 19, giving management the green light to complete the deal.
"Todays ISS recommendation to Hewlett-Packard shareholders represents an important milestone in the merger process," said Michael Capellas, Compaq chairman and chief executive officer. "We are particularly pleased with the recommendation as ISS conducted a thoughtful, thorough study of the merger. We eagerly await the ISS recommendation for Compaq shareholders in the coming days as this merger is clearly the single best way to deliver value for our shareholders, customers and employees."
Compaq shareholders, who are largely viewed as in favor of the deal, will vote on March 20.
In general, the ISS sided with HP and its contention that the mega-merger, which would create the worlds second largest computer company next to IBM, provides the best growth opportunity for the company and its investors.
"While Mr. Hewlett makes a credible case that the risks associated with the transaction are real and material," the ISS report says, "we believe that managements upside scenario is achievable."
In general, HP contends that the merged company will realize $2.5 billion in operating efficiencies, dramatically boost its stature and revenues in IT services, and give it number one market share across several business segments, including PCs, enterprise storage, Windows and Unix servers and printing and imaging.
"We are pleased that ISS -- a truly independent expert -- recognized the strategic and economic logic of this combination as well as the thoroughness of the evaluation process undertaken by the directors of both HP and Compaq," said Fiorina. "ISS conclusions confirm our long-held conviction that the merger offers the best value to HP shareowners."
In arguing against the merger, Hewlett contends the deal will increase the companys exposure to a weakening PC market, divert managements attention away from customers, and ultimately undermine corporate profits. Instead, he said, HP should focus more on building up its imaging and products division – a strategy the ISS rejected.
"While Mr. Hewletts focus-and-execute alternative strategy is attractive, and justifiably so, in the short-term, we believe that the Compaq merger provides a better means of maximizing long-term value by exploiting the potential of all of HPs assets rather than just a single crown jewel."
"We strongly disagree with the ISS decision," Hewlett said in a statement issued after the reports release. "We believe ISS has missed the point -- we believe that the HP/Compaq merger will destroy stockholder value."
In restating his opposition, Hewlett denounced the ISS for its trust in HPs management, comparing it to the trust investors had in former energy giant Enron before the company collapsed into bankruptcy due to scandalous, and potentially criminal, business tactics.
"ISS clearly has a predisposition to support management and makes a general presumption that boards do the right thing. In the post-Enron world, it is obvious that these assumptions need to be questioned," Hewlett said. "This transaction has substantial and unacceptable integration risks."
The ISS report assures that at least one of HPs largest shareholders, Barclays Global Investors, which controls about 3 percent of HP stock, will vote in favor of the deal. Barclay vowed to follow the ISS recommendation to avoid the appearance of a conflict of interest, since company Chairman Patricia C. Dunn currently servers on HPs board of directors.
The ISS report was compiled by a nine-member council that met several times with Fiorina, Capellas and Hewlett.