ISS Approves Of HP/Compaq Merger

A report issued by Institutional Shareholder Services Tuesday gives the green light to a proposed $22 billion merger between Hewlett-Packard and Compaq Computer Corp. .

The Rockville, Md.-based firm made its advisement after looking over all of the proxy materials and meeting with company executives including HP CEO Carly Fiorina Compaq CEO Michael Capellas as well as Goldman Sachs, HP’s investment banker.

While it has no direct connection to the vote, the firm has influence, advising nearly 1,000 clients including fund companies on corporate issues.

In its opinion, ISS says, “We have found adequate grounds to justify supporting the merger in the form of an exhaustive integration plan and a record of board discussions among reputable independent directors that allows us to confidently trust the judgment of eight of nine members of the HP board.”

That lone holdout being HP board member Walter Hewlett, the son of company co-founder William Hewlett who is campaigning to stop the HP/Compaq marriage.

HP management was pleased to say the least.

“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, says Fiorina. “ISS’ conclusions confirm our long-held conviction that the merger offers the best value to HP shareowners.”

Merger opponents, including Hewlett, the William R. Hewlett Revocable Trust and its trustees, only make a fraction of the company’s total shareholders. But a HP has said a negative reaction from the ISS would have been a serious blow to the deal.

The ISS also recognized several of the key points brought up by Hewlett during the last few months, most notably integrating the two companies.

In its opinion, ISS says, “We share Mr. Hewlett’s belief that integration is one of the most daunting problems facing a combined HP-Compaq, and while we would caution that past failures cannot predict future results, we agree that Ms. Fiorina, Mr. Capellas et. al. bear a significant burden of proof if they are to convince shareholders that HP-Compaq can buck the trend and integrate successfully enough to meet management’s financial and strategic projections.

The ISS took note of the internal board meeting notes that Hewlett issued to the Securities and Exchange Commission (SEC)

Hewlett, who is rallying against the merger online at the ‘Vote No HP Compaq’ Web site>, said in a statement that ISS “missed the point,” and that “this transaction (HP/Compaq merger) has substantial and unacceptable integration risks.”

HP has established its own ‘Vote The HP Way’ merger support site.

Even though the recommendation is not a prediction of how shareholder’s will vote, it does advance Fiorina’s goal of bringing the two companies together to create the second largest computer company behind IBM .

HP shareholders are expected to vote on the merger on March 19. Compaq investors will vote the next day. An HP spokesperson said the results might not be known right away.

Shares of HP rose $0.38 to $20.97 as investors nervously waited for the report to come.

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