Glass Lewis On The Block; ISS Set to Pounce?

Article published in Agenda Week on Sep 17, 2007
By Kristin Gribben

Suffering from key employee departures and governance concerns, Glass, Lewis & Co., the second-largest proxy advisory firm, is being shopped by its parent, Chinese-headquartered Xinhua Finance, according to several sources.

Institutional Shareholder Services new parent company, RiskMetrics Group, is considering making a bid for the company, two of the sources say. Spokeswomen for Xinhua Finance and RiskMetrics declined to comment.

ISS's dominant position in the industry, with over 1,700 clients, has been cited as a barrier to competition, according to the recent report on the proxy advisory industry by the Government Accountability Office. Glass Lewis, however, has become the main alternative to ISS and a check on its influence. A deal combining the two firms would damp competition and hit boardrooms hard.

When Carl Icahn waged a proxy battle at Motorola this spring, for instance, ISS supported him while Glass Lewis supported management. Icahn ultimately lost his bid for the board seat. Furthermore, most large institutional investors subscribe to more than one proxy advisory service to better inform their decisions on proxy voting. There are three other proxy advisors in the marketplace, but none of them have enough market share to fill in as the No. 2 firm anytime soon, says Eleanor Bloxham, CEO of The Value Alliance, an organization that provides consulting services to boards.

"This news should only heighten [directors'] awareness" of the proxy advisory industry, Bloxham says.

It would take awhile for a dominant alternative firm to emerge, Bloxham says, adding that the formation of niche firms that cater to particular industries or issues is more likely.

Before it was acquired by RiskMetrics for $553 million in the fall of 2006, ISS explored an offer for Glass Lewis, according to a source. Xinhua Finance ended up buying Glass Lewis for $45 million, taking an initial 20% stake in August 2006 and completing the transaction in December.

Another party that has expressed interest in buying Glass Lewis is a group of former Glass Lewis employees who are shopping around for a private equity buyer, according to the source. But with the current credit market squeeze, securing private equity will be more difficult.

News that Xinhua Finance was looking to sell Glass Lewis and that RiskMetrics is a potential buyer was first reported recently in the publication Global Proxy Watch.

The move by Xinhua Finance to sell Glass Lewis follows key departures that struck the proxy advisor hard, say several sources. Prominent members who left the firm since it was bought include Lynn Turner, head of research and former chief accountant at the SEC; Jonathan Weil, managing director; and Greg Taxin, the firm's former chief executive, who was recruited by Xinhua but quickly left. Weil made his resignation letter public following his departure, saying he is "uncomfortable with and deeply disturbed by the conduct, background, and activities of Glass Lewis's new parent, Xinhua Finance Ltd., its senior management, and its directors."

Xinhua Finance's CFO, Shelly Singhal, was forced to resign in May after media reports surfaced that he performed investment banking services for companies purportedly involved in fraudulent activities.

"The possible sale of Glass Lewis has been rumored for months since their high-profile staff departures early this summer," says Scott Fenn, managing director for policy at Proxy Governance, a competitor that stands to benefit from a combination of ISS and Glass Lewis. "I expect they want to close a sale [of the company] before year-end, when many client subscription agreements come up for renewal."

There's precedent for ISS swallowing up its competitors. Before it was acquired by RiskMetrics, the firm combined with rival Proxy Monitor in 2001 and then purchased Investor Research Responsibility Center in 2005.

However, the consolidation of the two biggest players in a small industry raises antitrust concerns. Despite this, it seems unlikely that the Justice Department or the Federal Trade Commission would block a sale of Glass Lewis to RiskMetrics or any other competitor in the industry.

Dave Federbush, an attorney in Maryland and former prosecutor with the FTC, says the mergers that get blocked by federal regulators represent a very small percentage. Regulators operate on a budget and are limited in the number of mergers they can block. When they attempt to do so, it's usually to make an example out of the situation, Federbush says.

"When you take an action [to block a merger] it's often not solely concerned about the two companies," he says. "They are likely to go after companies that are high profile."

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