The next arena in the fight for the future of Hewlett-Packard is an unlikely one -- the Rockville, Maryland offices of Institutional Shareholder Services (ISS).
Ram Kumar, Patrick McGurn and a handful of other analysts at ISS are scheduled to receive visits over the next few weeks from both the leading champions and the foremost critics of Hewlett-Packard's proposed merger with Compaq Computer.
Carleton Fiorina and Michael Capellas, the chief executives, respectively, of Hewlett and Compaq, joined by a advisers and board members, will try to persuade ISS, a proxy voting consultant, that combining the two computer makers is a sound strategic step. And the dissident H-P director, Walter Hewlett, and his advisers will present the case that the merger plan is a bad one.
After listening to both sides, ISS will issue a recommendation to its hundreds of institutional clients for or against the deal. Its decision, expected two to three weeks before the vote on the merger, could perhaps determine the deal's fate. That is because the company is such an influential adviser to institutional shareholders and those institutions hold an estimated 57 percent of Hewlett-Packard's shares.
"As an institutional investor, if you're voting against ISS, you had better have some darn good reason," said Richard H. Koppes, former general counsel of the nation's largest pension fund, the California Public Employees' Retirement System, or Calpers.
Koppes was the general counsel of Calpers from 1986 to 1996, and he watched the influence of ISS rise as institutional shareholders came to own larger and larger stakes in major corporations. Today, Koppes is a lawyer at Jones, Day, Reavis & Pogue, and he advises companies on questions of corporate governance.
In contested mergers or proxy fights for control of a corporate board, the rival sides often make pilgrimages to Rockville, Maryland, to woo ISS -- just as they are doing in the H-P case. "They go in groups, and they kiss the ring," Koppes remarked.
Independent assessments
The advisory firm's recommendation, of course, will not sway all institutional shareholders. Some institutions -- particularly index funds, which buy a company's shares based on its proportionate size in the stock market -- delegate voting on proxy issues, including mergers, to ISS. But others, especially funds whose managers carefully study individual companies before investing, will note the ISS recommendation, but will make their own assessment of the merger.
An internal analysis at H-P found that as many as 20 percent of all shareholders would have their votes on the merger influenced or determined by the recommendation of ISS. And yet, a report last Friday by AM Sacconaghi, an analyst at Sanford Bernstein & Co, estimated that only 8 percent or 9 percent of Hewlett's shareholders -- the index portion of the institutional investors -- would have their votes determined by the recommendation.
One of H-Ps largest shareholders, Barclays Global Investors, which holds more than 3 percent of Hewlett shares, has already said that ISS will vote its shares. Barclays made the announcement to remove any appearance of a conflict of interest, since Patricia C. Dunn, co-chairwoman of Barclays Global, is on H-P's board.
If ISS opposes the merger, the deal -- and the tenure of Fiorina, whose reputation is tied to the Compaq acquisition -- would appear to be in danger. It would represent a second unnerving setback, after the heirs of the H-P founders said they would vote their stock and that held by family foundations, totaling 18 percent, against the merger.
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