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Conflicting headlines on ISS’s recommendation regarding their Proxy recommendation made us scratch our heads.  

IGT’s press release headline reads: “PROXY ADVISORY FIRM ISS RECOMMENDS THAT IGT SHAREHOLDERS REJECT TWO OUT OF THREE OF THE ADER / MATHEWSON GROUP'S NOMINEES, INCLUDING CHARLES MATHEWSON” and states "Institutional Shareholder Services (ISS) recommends that IGT shareholders  vote to elect seven of IGT's eight director nominees.” 

Ader Group’s press release headline reads:  “Group announces that ISS recommends International Game Technology holders vote gold proxy card.”

 

We got our hands on the report and IGT’s press release is definitely misleading, if not entirely inaccurate.  The ISS reports recommends that shareholders “DO NOT VOTE” on the management ballot which seeks to re-elect all 8 nominees.  The report recommends that shareholders “VOTE” for Dan Silvers and 5 of the existing IGT Board members, including Janice Chaffin, Greg Creed, Patti S. Hart, Robert J. Miller and Philip Satre.  ISS explicitly withheld its vote for Raymond J. Brooks and Charles N. Mathewson.  

The report also outlines the dissident case for discontent and their plan if elected to the Board along with IGT’s response.  The report then goes on to analyze the merit of the dissident case, asking the question if the ADER has made a compelling case for change and concludes that YES they have.

In the company’s continuing difficulties in redressing the weakness of its core business segments, the uncertainty about the potential of the online diversification efforts, and the sustained shareholder doubt reflected in IGT’s persistent stock underperformance, the dissidents have demonstrated a compelling case for a greater shareholder perspective on the board.”

  • Stock performance:  IGT has underperformed their peer benchmarks over a 1, 3, and 5 year period ended January 7, 2013 (the date where the dissidents filed their intentions to get on IGT’s Board).  ISS also found it troubling that IGT had not shared in the peer group's recovery over the past year where the comp set increased 18% vs. the S&P’s 17% while IGT declined 12% over the same period.   IGT has underperformed all of its peers with the exception of SHFL in 2012.
  • Core operations:  Expressed concerns surrounding the decline in IGT’s gaming operations business
  • Interactive opportunity:  Double Down’s results have been promising so far, but it's too early to tell whether IGT’s efforts to diversify through the interactive channel will “pan-out”.  ISS also states that wisdom of IGT’s online strategy will hinge on their ability to maintain healthy margins in this business while the online industry evolves.
  • Governance:  ISS concludes that IGT implemented a lot of improvements surrounding pay for performance in 2012 after dealing with widespread investor discontent, but wonders why it took them so long in the first place.

The ISS report then goes on to opine which Board nominees are likely to effect change.

  • Support for Dan Silvers:  ISS supports Dan Silvers given his representation of the dissident shareholder group, his experience as an analyst and investor in the gaming industry and his financial background.
  • Withholding support for Brooks:  Brook’s background is primarily in restructuring and IGT doesn’t need radical change so his background isn’t the best fit
  • Witholding support for Mathewson:  IGT opposes Mathewson since he is viewed as the most controversial candidate from IGT’s standpoint