ISS: Long-Term Gains Justify Merger Support

Hewlett-Packard Compaq Computer

In a 25-page report issued Tuesday and authored by Ram Kumar, ISS' assistant director, U.S. research, ISS rejected Walter Hewlett's "focus and execute" strategy and instead supported the merits of the deal as championed by HP and Compaq management.

"We are unable to confidently embrace the focus and execute strategy as superior to the Compaq merger," the report said. "The linchpin of Mr. Hewlett's plan ... is the proposal that the imaging and printing business be spun off at some time in the reasonably near future."

But the report said that while providing short-term gains for investors, Hewlett's plan would not be a long-term viable option. Instead, the report said, "We believe that management has provided reasonable reassurance, in the form of integration planning, that the merger can be successfully executed and this long-term value can be achieved."

Carly Fiorina, HP's chairman and CEO, said in a statement, "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. ISS' conclusions confirm our long-held conviction that the merger offers the best value to HP shareowners."

Michael Capellas, Compaq chairman and CEO, added in a statement, "Today's ISS recommendation to Hewlett-Packard shareholders represents an important milestone in the merger process. 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."

But Hewlett countered in a statement: "ISS has primarily advised its clients on matters related to corporate governance. ISS clearly has a predisposition to support management."

Joe Burke, vice president and general manager of midrange business, for the North American Computer Products group of Arrow Electronics, Englewood, Co., noted, "It appears that these guys [HP and Compaq management are committed and prepared to make the tough decisions. If ISS had come out and said 'no way', the deal would have been dead. But now that they have supported it, the deal is very much alive. But it's no shoo-in," he said.

ISS said it was the effort that HP and Compaq management put into integration planning that most impressed it, the report said. "We share Mr. Hewlett's belief that integration is one of the most daunting problems facing a combined HP-Compaq."

But ISS noted that the companies sent the top brass of the integration team to make presentations to the proxy firm. "It's hard to remain unimpressed in the face of such enthusiastic attention paid to the integration effort."