The Growing Proxy Advisory Influence on M&A Outcomes: A Case Study of Core Scientific's Proposed Sale to CoreWeave

The rise of proxy advisory firms as gatekeepers in corporate governance has reshaped the dynamics of mergers and acquisitions, particularly in high-stakes tech deals. Nowhere is this influence more evident than in the contentious proposed sale of Core Scientific to CoreWeave, a $9 billion all-stock transaction that has sparked fierce debate over governance practices and shareholder value preservation. This analysis examines how proxy advisory firms like Institutional Shareholder Services (ISS) are increasingly dictating M&A outcomes-and the implications for corporate boards navigating complex tech-sector deals.

A Flawed Process and Governance Risks

Core Scientific's board faced immediate scrutiny for its handling of the sale process. According to an ISS report (Leading Proxy Advisory Firm Institutional Shareholder Services Recommends Core Scientific Shareholders Vote "AGAINST" Sale to CoreWeave on GOLD Proxy Card), the board conducted an "exclusive sale process on a short timeline without fully evaluating alternatives or considering outreach to financial acquirers." This approach, critics argue, prioritized speed over due diligence, leaving shareholders exposed to a suboptimal outcome. The absence of a robust auction process-a staple in modern M&A-undermined the board's fiduciary duty to maximize value.

The governance risks extended beyond procedural flaws. The merger structure itself, which exchanges Core Scientific shares for CoreWeave stock, left shareholders vulnerable to the volatility of CoreWeave's equity. Notably, CoreWeave's shares remained subject to a lockup period, during which insider selling restrictions prevented market equilibrium, ISS said. This created a "double whammy" for Core Scientific shareholders: their holdings became tied to a stock with limited liquidity and no collar to mitigate further declines, ISS also argued.

Shareholder Value: A Question of Fairness

The valuation of the deal has become a flashpoint. Two Seas Capital LP, a 6.3% stakeholder in Core Scientific, argued that the offer undervalued the company by a significant margin. As stated by Two Seas in its definitive proxy statement, CoreWeave's stock had traded at a consistent premium to the offer price since the expiration of its lockups, suggesting the deal's terms were inherently unfair. This disparity was starkly illustrated when Core Scientific's stock plummeted 18% following the announcement-a drop Two Seas labeled "one of the worst one-day declines for an M&A target this century."

The market's reaction underscores a broader issue: when M&A deals rely heavily on stock swaps, the acquirer's share price becomes a critical determinant of value. In this case, CoreWeave's CEO, Michael Intrator, has refused to revise the offer despite shareholder resistance, asserting confidence in the company's long-term trajectory, as reported in a FinancialContent article (CoreWeave CEO Holds Firm on $9 Billion Core Scientific Offer Amidst Shareholder Outcry). Yet, ISS noted that this stance ignores the immediate risks posed by CoreWeave's stock volatility.

Proxy Advisory Firms: Power and Peril

The ISS recommendation against the deal exemplifies the growing clout of proxy advisors in shaping M&A outcomes. By advising shareholders to vote "AGAINST" the transaction, ISS effectively signaled that the board had failed to meet governance standards. This intervention has far-reaching consequences: companies that ignore proxy advisory guidance risk reputational damage, regulatory scrutiny, and, in some cases, shareholder lawsuits.

However, this power is not without controversy. Critics argue that proxy advisors often prioritize short-term shareholder returns over strategic long-term value creation. In the Core Scientific case, the focus on immediate valuation gaps and structural risks may have overshadowed potential synergies between the two companies. As one analyst noted, "The proxy advisory model is inherently backward-looking, which can distort assessments of forward-looking tech deals."

Conclusion: Balancing Governance and Value

The Core Scientific-CoreWeave saga highlights a critical tension in tech M&A: the need to balance rigorous governance with the preservation of shareholder value. While proxy advisory firms play a vital role in holding boards accountable, their influence can also create friction in deals where strategic logic and market dynamics diverge. For corporate leaders, the takeaway is clear: transparency, flexibility, and a willingness to engage with dissenting shareholders are essential in navigating the proxy advisory landscape.

As the vote on the CoreWeave deal approaches, the outcome will serve as a litmus test for the evolving role of proxy advisors in shaping corporate governance. One thing is certain: in the tech sector, where valuations are volatile and strategic moves are paramount, the interplay between governance and value will remain a defining challenge.