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March 18, 2002  3:00 pm Pacific Time; Updated from March 7 report.

SOURCE:  Parish & Company at

Disclaimer:  The facts in this report are complicated and involve timing issues and therefore please be sure to conduct your own research.  My overall objective remains the same, that is, to get ISS to come clean on its ownership structure and thereby evaluate any independence related issues.

Two Institutional Shareholder Services (ISS) Directors Identified.  ISS, together with Barclays Global, Assumes Key Role in Microsoft Financial Pyramid Scheme to Collapse Hewlett Packard and Create Unique Risk to Pension Fiduciaries.  ISS refuses to disclose its ownership structure on its website prior to key HP Compaq vote, in particular the timing and full extent of its relationship with Warburg Pincus, Hermes in the UK and others.  Warburg Pincus key holding, BEA Systems, recently announced "landmark partnership" with Hewlett Packard.

PORTLAND, Ore.,  Parish & Company today discloses updated findings regarding its review of Institutional Shareholder Services (ISS) and the proposed HP Compaq merger based upon a detailed review of regulatory filings with the SEC and extensive interviews. ISS is now strangely the most powerful investment firm in the United States and few people understand its activities and significant conflicts of interest with Barclays, one of the biggest managers of public pension funds in the US and also one of HP's largest shareholders.

According to an August 6, 2001 article in Pensions and Investments, Institutional Shareholder Services CEO Jaime Heard is quoted as saying that Warburg Pincus would control two of eight seats on its board of directors.  One need only visit and examine Compaq's largest shareholders to see that as of 12/31/2001 Warburg Pincus Credit Suisse owned more than $112 million in Compaq stock.  This is very confusing because, technically, Warburg Pincus sold its asset management business to Credit Suisse in 2001. One could argue that this is therefore not a conflict of interest yet before doing so many of these other relationships should be fully examined.

Much more interesting is that Warburg Pincus has a significant investment in BEA Systems, more than $2 billion, and recently BEA announced a new "landmark partnership" with Hewlett Packard which will bring significant new revenues to BEA Systems.  One might ask, if true, should HP management not be required to disclose this prior to the vote on merging with Compaq given two ISS directors are at Warburg Pincus.

In an effort to help ISS come clean on potential conflicts of interest surrounding its opinion in the HP Compaq merger and in an effort to help generate a most important disclosure in this Enron/Arthur Andersen era, Parish & Company will hereby perform 25 percent of the footwork for ISS by identifying the following 2 directors and their backgrounds, taken from the website at  I did also call and confirm this directly with a representative at Warburg Pincus.

From Warburg Pincus Website, we can see the following 2 directors, both are active in the technology area in investment banking:

1)  Mr. Colodny, age 34, has been with Warburg Pincus since 2001. He received an AB from Harvard College, an MBA from Harvard Business School and a JD from Harvard Law School. He previously worked as Senior Vice President of Corporate Development at Primedia Inc. and as a reporter at Fortune Magazine. Mr. Colodny is a Director of Institutional Shareholder Services (ISS) and GlobalSpec.

2)  Patrick T. Hackett was Vice President and Treasurer of Cove Capital Associates Inc., a private merchant banking organization, prior to joining Warburg Pincus in 1990. He graduated from the University of Pennsylvania with a B.S. in chemistry and a B.S. in economics from The Wharton School of Business. He is a director of Citadon, ec-HUB, eVerger, Institutional Shareholder Services, MediaMap, Privista and Workscape.

It is remakable that neither the NY Times or Wall Street Journal, even after having my report since last Thursday, have printed this story regarding ISS independence issues and not posting its ownership structure on its website, given the significance of the HP Compaq vote.  Both publications have full page ads from HP management supporting the merger.  If the merger does go through and independence issues become germane after the vote, both publications will have clearly compromised their integrity.

It is also noteworthy that has been using sophisticated screening mechanisms to limit access to this report.  Meanwhile, Hewlett Packard is using an aggressive advertising campaign on Yahoo, quoting the ISS report, and citing it as the "leading independent analyst."  Yahoo is a fine site yet is also severely impairing its reputation by blocking messages to this report and simultaneously accepting large revenues from HP.  If spam is truly an issue, perhaps Yahoo could release its records confirming this.

Numerous web links follow this report and corroborate its findings outlining various major conflicts of interest at ISS.  This report has been forwarded to the SEC's Chief of Staff. Link 9 confirms the significant amount of fixed income securities purchased by Hermes, ISS's new parent, and link 11 confirms Barclays is one of the biggest providers of such securities.  Also see my one page preliminary report for valuable background information.

ISS is a proxy company that markets itself as an independent analyst able to render objective opinions on major merger transactions and these opinions are having a profound impact on the economy and capital markets.  ISS recommendations are followed by most institutional managers without realizing that ISS not only has substantial conflicts of interest, but has also become a key enabler of financial fraud at the Microsoft Corporation, as explained in this report.  Most mutual fund investors never stop to think who is voting their shares on major mergers.  These votes are often effectively cast by ISS.

Included in this review is a focus on two transactions approved by ISS, the first being Weyerhaeuser's hostile takeover of Willamette Industries.  Although Willamette Industries was the industry leader, better managed and not using financial engineering to inflate profits like Weyerhaeuser, ISS voted in favor of the takeover and now its primary clients, Wall Street investment houses, are able to earn a minimum of $250 million in commissions and fees on the $5.5 billion in bonds necessary to finance the transaction.

The second transaction, which is the primary focus of this report, is Hewlett Packard's offer to issue more than $20 billion in stock to purchase Compaq Computer.  Before reviewing the HP Compaq analysis let me first introduce some thought provoking "issues" I've identified regarding ISS and these merger transactions, followed by specific background on ISS and then finally the specifics of their review regarding the HP Compaq proposal.

A.  Significant Issues Regarding Institutional Shareholder Services Include:

1)  ISS is owned by Hermes, one of Britain's largest pension management companies.   One might ask, is it appropriate for a British firm to maintain a complete monopoly over proxy voting services here in the US?  In addition, do Hermes' relationships with large public pension systems like Calpers impair ISS's independence in recommending mergers?

Calpers sent a most unusual letter to Willamette Industries encouraging them to accept Weyerhaeuser's hostile takeover bid after ISS voted in favor of the hostile takeover, yet the Calpers investment in Willamette was small.  This letter helped convince Willamette to give up its fight and then resulted in a bond underwriting fee windfall for Wall Street, ISS's primary customer base, as Weyerhaeuser issued $5.5 billion in bonds to finance the takeover.

2)  Analyst independence following Enron has become more important yet recent Congressional hearings completely ignored the most important analyst out there, who some consider the analysts' analyst.  This is ISS.  Even leading investor advocates with unquestionable integrity, including John Bogle of the Vanguard funds and Warren Buffett, have not spoken out and challenged ISS and its recommendation on the HP-Compaq merger.  In Oregon, where HP is a major employer, neither Gordon Smith nor Ron Wyden, both US Senators, have spoken out on ISS and their impact on the public PERS pension system.  This is startling given the raging debate in Oregon over future PERS benefits.

3)  Institutional investors entrusted with public PERS pension funds, including Barclays Global and State Street, are not satisfying their fiduciary commitment to shareholders when they publicly state they will vote shares based upon ISS's recommendation when ISS is not in fact independent.  This is not unlike "check off" situations that occurred at Enron.

Could Barclays and State Street in fact be exposing themselves to class action lawsuits from securities litigation firms such as Milberg Weiss for breach of their fiduciary duty, even if they don't sign the ERISA 5500 report?  What are they going to say to John Smith and Sally Jones when they read about large losses to their retirement accounts and this lack of independence at ISS and how those managing their funds voted per ISS's recommendation?  Especially if one of their neighbors is a top performing employee of HP that unnecessarily loses their job due to the merger.

Barclays, generally perceived as a quality bank,  is one of the biggest players in corporate banking in Europe and involved with underwriting numerous fixed income investments.  ISS owner Hermes, one of Europe's most influential asset managers, is in turn one of the more important customers of such investments involving Barclays.

Barclays is of course also one of the largest managers of public PERS pension plays in the US, including the Common School Trust fund here in Oregon.

Barclays CEO Patricia Dunn, who sits on HP's board of directors and aggressively supports the merger, even publicly disparaged George Sauter and John Bogle of the Vanguard Group, calling them  'yesterday's news'  according to a June 30, 2000 article by Ian McDonald of summarizing comments at a Morningstar Investment Conference.

Imagine how teachers and other PERS participants will feel, given mounting state deficits and corresponding cuts to education, most notably teaching positions, when they learn that their retirement is being handled by a company run out of England, Barclays, that has completely abdicated their fiduciary responsibility in this most important voting matter by assigning this role to another company based in England, ISS, and that these two companies have significant conflicts of interest.  Equally startling are the planned layoffs to justify this ill conceived merger and related executive compensation packages.

4)  Hewlett Packard's purchase of Compaq is based upon pooling or "watered stock fraud" that will ultimately result in large pension losses.  Remarkably, ISS's evaluation was based more on future "strategy" and did not adequately examine the current reality and related financial statements.  Even Alan Greenspan confirmed on 3/7/2002 in testimony before Congress that Compaq's past earnings are seriously overstated due to stock option accounting.  They are indeed close to being unprofitable for the three year period ending 12/31/2001.

Even though Barclays Global based in SF may not want to use an internal proxy voting department to analyze how to vote on the HP Compaq proposed merger, it could simply issue a statement saying that due to considerable uncertainty surrounding the merger, Barclays would vote its index shares to not approve the merger between HP and Compaq.  At a minimum, Barclays should draw upon other leading analysts' work since Barclays is one of ISS's most significant clients and Barclays' CEO also sits on the board of Hewlett Packard.  This opinion could include drawing on Standard and Poors downgrading HP debt due to considerable uncertainty surrounding the merger, resulting in sharply higher commercial paper borrowing costs, as referenced in a March 7, 2002 story by Michael Barr of Dow Jones Newswire.

Barclays could also reference an article appearing in the NY Times on March 10, 2002 by Gretchen Morgenson titled "Divide and Conquer Strategy Comes Back to Haunt" regarding the effects of "share inflation."   Morgenson references brokerage industry studies that essentially replicate my related studies that refer to this share inflation for what it truly is, "watered stock fraud."

5)  Financial fraud at Microsoft is now resulting in numerous non-productive mergers among Microsoft's competitors due to their inability to compete with Microsoft's pyramid scheme.  Will Microsoft be the biggest winner as it eliminates Compaq and their desperate need to aggressively move toward innovation on the software side?  And will Intel be a big loser as two customers become one and exert more buying leverage due to the competition in processors that does not exist in the software operating system area?

Microsoft's destabilizing pyramid scheme was identified by Parish & Company in 1999.  See link to Microsoft Pyramid and its projected future impact on Hewlett Packard, forecast in 1999.  Who would believe that HP was actually more profitable than Microsoft in 1998 and 1999?

B.  ISS Ownership Structure and History:

ISS was founded by Bob Monks Sr. and later sold to Thomson Financial, a Canadian firm (ticker TOC), traded on the Toronto Stock Exchange.  Thomson makes most of its revenue selling investment research products and services to Wall Street.  A significant amount of these revenues result from "soft dollar" programs, as marketed on its web site.  This was of course a significant conflict of interest between Thomson and ISS.

ISS was later sold in 2001, after the Weyerhaeuser vote, to Proxy Monitor Inc., ISS's only real competitor.  This created a clear monopoly in the provision of these most important proxy voting services.  Proxy Inc. is owned by Hermes Asset Management based in the UK. Hermes manages 4 of the 7 largest UK pension plans, including being the principal advisor to the British Telecommunications (BT) pension plan.  British Telecomm, although independent of its pension plan, is one of Microsoft's key global partners. Bob Monks Sr., ISS's founder, is on the Hermes Asset Management board as Vice Chairman and Hermes' primary revenue source is asset management fees.

Hermes' purchase of ISS from Thomson Financial is reported in an August 20, 2001 article in Pensions and Investments titled "Too Close For Comfort."  The article quotes ISS as being sold to Proxy Monitor Inc. and that Hermes was the most significant investor in the transaction.

C.  ISS Analysis of HP Compaq Merger

1)  Financial Implications:  ISS clearly does not understand the financial implications of an HP Compaq merger.  This shortcoming is evidenced by their lead analyst's comment that "half a million man-hours of work have thus far been devoted to integration planning, which surely makes HP-Compaq one of the most exhaustively planned combinations ever."

This is as ridiculous as Microsoft saying our software program has 10 million lines of code versus another with only 1 million.  If anything, this massive effort is indicative of a serious structural problem and should be a red flag to all pension fiduciaries.

In addition to other basic financial matters, ISS did not consider the following, a critical analysis given Alan Greenspan's testimony before Congress and the introduction of the Levin-McCain "End the Double Standard on Stock Options Act."
Earnings "Before Taxes" per SEC 10K ($millions)
Compaq  Earnings Before Taxes 
Stock Option Wages Not Included 
Restated Compaq Earnings (Loss)

Note:  If Compaq's wages were adjusted to reflect stock options, as suggested in Alan Greenspan's testimony before Congress,  they would have been almost unprofitable for the three year period ending 12/31/2001.
Earnings "Before Taxes" per SEC 10K ($millions)
Hewlett Packard Earnings Before Taxes
Stock Option Wages Not Included 
Restated HP Earnings (Loss)

Note:  In HP's case they would still be highly profitable, even after restating for stock options.

In both cases the stock option wages not charged to earnings were derived by dividing the cash "tax benefit from employee stock options" amount by the standard corporate tax rate of approximately 35 percent.  For example, in 1999 Compaq took a tax deduction for stock option wages of $405 million which effectively reduced its taxes by $405 x 35 percent or $142 million, as reflected in their SEC 10K filing.

Using 35 percent is reasonable because the focus should be the incremental or marginal tax rate, not the effective tax rate computed as net taxes in relation to earnings before tax.  If you are not an accountant this area may be confusing yet it is accurate, as evidenced by the numerous analysts and journalists who have used my work, many without attribution, most notably Kathleen Pender of the SF Chronicle and David Cay Johnston of the New York Times.  Johnston used my analysis and applied it to Enron, without attribution, and this is how he was able to disclose that Enron paid no federal income tax.

Perhaps Alan Greenspan said it best when testifying before Congress on March 7, 2002 when he said that "stock options have inflated earnings ... and that Wall Street analysts are lazy for not taking them into consideration."  Greenspan also stated that Warren Buffett shares his views on options.  Parish & Company has been applying considerable pressure on the Federal Reserve Bank to speak out on this issue.

HP's earnings are also inflated due to options yet it is the degree of inflation that is critical.   The net impact is that Hewlett Packard has been more profitable than Compaq and even the Microsoft Corporation, after properly accounting for stock options.

2)  Creation of "Watered Stock": Also not considered by ISS is that this stock merger is a classic example of what Parish & Company has called "watered stock fraud."  See op-ed piece in the Portland Tribune on Microsoft and Enron to see how this impacts HP.  Op-Ed Piece Explaining Implications of Watered Stock Fraud  This piece is also very helpful in understanding the overall impact of Microsoft's pyramid scheme on the economy and capital markets.

It is now public knowledge that Robert Rubin, former Secretary of the Treasury and now Vice Chairman of Citigroup, lobbied the Bush administration for an Enron bailout.  Rubin was featured in a March 2001 Bloomberg Markets cover story based on Parish & Company's review of Citigroup.  This monthly publication is provided to all owners of Bloomberg terminals, the most respected source for information on various capital markets.  Given Citigroup's close ties to Hermes, ISS's parent, in particular in the Middle East, one has to wonder if Rubin is now working his rolodex to try to make this merger happen.  Citigroup invariably makes massive fees, sometimes directly and other times indirectly, from such mergers.  Indeed, Sanford Weill is now being paraded about by HP management as supporting the deal.  The other major technology industry supporter, Steve Case of AOL, has seen his company's prospects plummet since buying Time Warner.  AOL Time Warner is now also a "watered stock."

3)  Competitive Dynamics:  ISS has also demonstrated a serious lack of understanding regarding the competitive dynamics of the computer industry.  Clearly, the biggest winner in an HP Compaq merger will be Microsoft and the biggest loser will be Intel.  One need only go shopping at Office Depot and marvel at the $599 sticker price for Microsoft Office Professional next to the Compaq computer, complete with monitor, for roughly the same price.  Microsoft's incremental cost for another copy of Windows is the cost to burn a CD, about 50 cents, in addition to printing costs for manuals, about $10.  Anyone who seriously recommends adding a cost intensive, low margin business like Compaq's to Hewlett Packard is focused on Wall Street, not HP shareholders and customers.

Wall Street was clearly the obvious focus of ISS's analysis since it is their primary source of revenue.  ISS simply does not have the capacity to analyze the competitive dynamics of the computer industry.

One person who does have the capacity to evaluate this merger is Dave Farber, University of Penn professor, who was not only a key witness against Microsoft in its anti-trust trial yet also later invited to give presentations to top managers at Microsoft.  His views are so respected that even his strongest adversaries wish to hear them. Farber was also the designated top technical advisor to the FCC until 2000, is on various technical advisory boards and knows all the leaders in the industry.

Farber knows well that the problem in the PC space is that Microsoft has a stranglehold on innovation on the software side. Compaq was a great innovator yet Microsoft has since managed their profits as part of its distribution channel.   ISS made no such attempt to solicit Farber's opinion regarding Microsoft's impact on HP and Compaq's key markets.

Disclosure:  Dave Farber called me in the spring of 2001 regarding hiring me as his investment advisor.  I met him and his wife at the "Wild Ginger" restaurant in Seattle (perhaps the best Thai restaurant on the West coast) and we had an enjoyable 3 hour dinner.  My advice was to buy government securities, forget about his investments and enjoy his retirement for reasons unique to his situation.  We have not spoken since and I am not now nor have ever been his investment advisor.  Dave was particularly interested in my views on Microsoft, knowing that at one time I had several additional reports on my web site.

D.  Summary Review of Institutional Shareholder Services (ISS):

More than two hundred years ago, an angry group of colonists dumped shiploads of tea in Boston harbor and claimed "no taxation without representation."  Today the UK and US have closely linked economies and we benefit each other enormously.  We here in the US, in particular, benefit from the more objective and independent British business press as seen in publications like the Economist, newspapers like the Independent and web sites including TheRegister.

What we are not benefiting from however is the ruse called Institutional Shareholder Services.  Even though ISS has a facade of independence and most of its employees are in an office in Rockville, Maryland, its recommendation to approve the HP-Compaq merger has compromised its integrity and exposed its real focus.  This is not shareholders but rather Wall Street.  And even though both of the CEO's of Barclays and ISS owner Hermes are on the "Queen's Birthday List," they should probably be more concerned about being on Milberg Weiss' birthday list, the leading class action securities litigation firm now handling the Enron case of whom the biggest losers were public pension plans.

Lessons from Enron were clearly ignored by ISS.  It's now up to Barclays, State Street, Vanguard and other institutional managers to make sure that class action securities attorneys are not the big winners in this ill conceived merger.  This can only be done by voting against the merger.  Even if these institutions such as Barclays, entrusted with the public PERS and private 401K pension system, are not signing the 5500 ERISA pension filings as the primary fiduciary, they may indeed be liable for the impact of this vote.  Pleading ignorance regarding ISS's lack of independence and failed analysis will probably sound a bit like Jeff Skilling of Enron saying he "had no knowledge of that."

Reuters, one of Microsoft's key partners, certainly won't provide much help.  After sending a copy of this report to numerous leading reporters at Reuters, a story came across the wire regarding ISS with no mention of Hermes and its conflicts of interest with Barclays or any other substantive matter in this report.  It is most surprising that many still view Reuters as a wire service when in reality it has become more like an extension of Microsoft's public relations organization than a hard news group.

My strong recommendation to ISS is to reexamine their opinion and vote against the merger due to significant subsequent events, including the downgrading of HP's debt, Calpers voting against the merger, etc. This will allow Barclays, State Street and others to save face given the lack of integrity they have shown by defaulting to ISS, something Vanguard clearly doesn't need since they will most certainly vote against this ill conceived merger for clear financial reasons.

Questions and comments regarding analysis by Parish & Company are always most appreciated and will receive a response.  All such comments remain strictly confidential and they may be sent to

*** All parties referenced in this report will receive both an email and fax copy of the report along with comments.  This includes Tom Taggert and Patricia Dunn of Barclays Global, Patrick McGurn of ISS and other interested parties. The research directors and top management at firms representing HP's largest shareholders, some of whom are listed below, have also been provided the report.

Key Decision Makers at HP's Largest Investors
Mark Lehmann -Director of Equity Research at Bank of America Securities
Joe Wagonfeld - Computer Hardware Analyst at Bank of America Securities
Bruce Herring - Director of Research at Fidelity Investments
Ned Riley - Director of Research at State Street
John Biggs - CEO of TIAA-Cref
George Sauter - Principal Fund Manager at The Vanguard Group
Peter Norris - Director of Research at the AXA Group (French conglomerate that owns Alliance Family of Funds)
Will Robbins - Director of Research at Capital Research (owns American Family of Funds and "Washington Mutual" mutual fund, not to be confused with Washington Mutual Bank)
Kurt Moser - Director of Research at State Farm
Steve Gorman - Director of Research at Putnam Investments
Chris Davis - Principal in the Davis Family of Funds
Tom Taggert - Director of Investor Relations at Barclays Global

Disclosure:  Neither Parish and Company nor any of its clients have owned either Hewlett Packard or Compaq stock during the last year.

Links Supporting This Report:
1) Bob Monks Web site:
2) Institutional Shareholder Services (ISS):
3) Thomson Financial:
4) Hermes Asset Management:
5) Hermes Focus Asset Management Organizational Chart (Bob Monks is Vice Chairman):
6) Hermes Press Release Announcing That It Manages Assets for CalPers
7) British Telecom Pension Annual Report, Notes Hermes Principal Investment Manager on Page 2
8) Barclays Global - Note Barclays is a Big Player in Corporate Banking and Related Bond Underwriting with Hermes, owner of ISS, one of its more significant customers.
9) Hermes Fixed Income Trading Activities in Europe, Discusses New Trading System Needed to Handle Activity
10) Short Article Showing Barclays Big Player in Debt Underwriting
11) Business Week Article Noting Barclays One of Biggest Underwriters of Junk Bonds in Europe (Keep in Mind that Fund Managers Like Hermes Compete for Participation in Such Issues)
12) John Bogle's Corporate Governance Speech:
13) CBS Marketwatch Story March 5, 2002 Story Quotes ISS Saying Half a Million Man Hours on Integration Study
14) Hewlett Packard Corporate Web Site Supporting the Merger
15) Walter Hewlett Web Site Opposing the Merger
16) IVS Associates Website, Firm That Will Tabulate and Certify the Vote
17) Article Describing IVS Associates and the Mechanics of the Voting Process
18) Joele Franks, Walter Hewlett's PR Firm (Also Supported Weyerhaeuser in Hostile Takeover)
19) Walter Hewlett's Investment Advisors in Charge of Preventing the Compaq Merger
20) Microsoft Press Release Explaining one of Many Key Partnerships with British Telecomm (BT)
21) Greenspan Testimony Confirms Compaq Past Earnings More Overstated Due to Stock Options
22) Original Microsoft Financial Fraud Summary Published in 1999 Including Projected Impact On HP
23) Follow-Up Parish & Company Comments on Microsoft Pyramid and "Roll-Up" Merger Phenomena
24) Surprise HP Downgrade Could Hurt Merger,  March 8, 2000 Story by R. Weissman of
25)  Yahoo Finance, type in HWP or CPQ ticker symbol and see large HP banner ads touring ISS report.  Note that if a link to this report is posted on a forum message board it will be filtered by Yahoo as of 3/7/2002.
26)  Warburg Pincus Website with Background on 2 ISS Directors


Bill Parish of Parish & Company is an independent Registered Investment Advisor.  His work has been widely quoted in the NY Times, Bloomberg, USA Today and other leading publications.  Many of these reports are available for review at  Bill is a strong supporter of former SEC Chairman Arthur Levitt's reform agenda announced on September 28, 1998 and he has also been a keynote speaker at various conferences of investment and accounting professionals.  You can contact Bill at if you would like to have him speak at your event.

Bill Parish
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR  97223
Tel:  503-643-6999  Fax: 503-221-3161
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