DealTalk: ISS loses some influence as investor vet deals

NEW YORK Wed Dec 15, 2010 1:58pm EST

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NEW YORK (Reuters) - Proxy advisory firm ISS/Risk Metrics Group once held sway in determining the success or failure of shareholder votes on mergers, but recent deals show investors might now be thinking more for themselves.

In several high profile deals, such as Lions Gate Entertainment Corp (LGF.N), Barnes & Noble Inc (BKS.N), Casey's General Stores Inc (CASY.O) and Airgas Inc (ARG.N), investors broke from ISS's recommendation and made their own decisions.

"In general, institutional shareholders are very well informed. Given their sophistication, they typically form their own view, rather than outsource it," said Jeffrey Kaplan, global head of mergers and acquisitions of Bank of America Merrill Lynch (BAC.N).

"ISS may be a good housekeeping seal for smaller investors, but large institutions typically form their own views," Kaplan said.

ISS (Institutional Shareholder Services) did not return calls seeking comment.

"Ordinarily, an ISS recommendation is a decisive victory. Index investors are pretty passive. But in more complicated or hostile situations, ISS does not mean automatic victory," said Columbia University Law School professor John Coffee.

"I don't think they are losing their clout, but they are in the danger zone of where the rubber meets the road," Coffee said.

Although ISS holds more influence than rivals Glass Lewis & Co, Egan-Jones Proxy Services and PROXY Governance, it may have lost some sway in recent years as investors became more active, investment bankers said.

"The ISS glory days may be the Compaq days," said one investment banker, referring to ISS's endorsement in 2002 of Hewlett-Packard Co's (HPQ.N) merger with Compaq, which gave that deal a major boost. The investment banker declined to be named because he was not authorized to speak with the media.

ISS SUPPORT NOT A GUARANTEE

In the recent case of Lions Gate, ISS supported three of Carl Icahn's five nominees, saying the entertainment company's performance over the past five years underscored doubts about its pace toward profitability.

Investors, however, voted in favor of all of Lions Gate's nominees.

Activist investor Icahn, with a 33 percent stake in the company, was making a hostile $7.50 a share takeover offer for Lions Gate.

Icahn had forecast it would be "virtually impossible" to win the board seats after a New York judge denied his motion to block a big investor from voting his full stake.

ISS's support of Icahn's nominees was a controversial call and one that was not guaranteed to be fully followed, Coffee said.

"Icahn is not the image of the model shareholder. Recommending that investors vote for a corporate raider's candidates can be a controversial recommendation," Coffee said.

FOLLOWING SOME, BUT NOT ALL, ISS RECOMMENDATIONS

Institutional investors are taking a much more nuanced approach in weighing ISS recommendations, bankers said. Shareholders may follow some of the ISS recommendations, but not all.

In the case of Airgas, ISS made multiple recommendations, only some of which were followed by investors.

Airgas has been resisting a takeover bid from Air Products and Chemicals Inc (APD.N) since February. Air Products made its "best and final" offer last week, offering $70 per share and valuing Airgas at $5.9 billion.

ISS had advised against an Airgas bylaw change to move the shareholder meeting date. Shareholders voted against the ISS recommendation, but moving the meeting date was since found illegal by the Delaware courts.

Investors, however, followed ISS's recommendations to back the board slate proposed by Air Products.

"When a company is in play, the shareholder mix dramatically shifts so it should be expected that the shareholders will be more aggressive than ISS," said Francis Aquila, a mergers and acquisitions attorney at Sullivan & Cromwell in New York.

Similarly, shareholders were split with their decisions to follow ISS in the Barnes & Noble Inc (BKS.N) proxy battle.

ISS had recommended that shareholder support dissident investor Ron Burkle's efforts to join the bookseller's board, but investors instead supported the slate chosen by Chairman Leonard Riggio. Still, shareholders followed ISS recommendation to renew a poison pill at special meeting.

"ISS is still very important and will continue to be important, but ultimately, it's up to the shareholders to decide these issues on a case by case basis," Aquila added.

(Reporting by Jessica Hall; additional reporting by Michael Erman and Phil Wahba; editing by Andre Grenon)

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