A shareholder plan to break up chip-equipment maker ASM International ( ASMI) has won the support of a key ally a few weeks before investors will have a chance to vote on the matter.

Institutional Shareholder Services, an influential proxy advisory firm, endorsed a plan that would divide the struggling Dutch company into two separate firms, saying that ASMI's management has "by its own actions, lost investor confidence."

The plan to break up ASM is being advanced by Mellon HBV Alternative Strategies, an institutional shareholder that has owns a 7.7% stake in the company.

ASMI concluded in early October that "a change in its current business model" is not in the best interest of shareholders. Shareholders will have a chance to vote on the matter at a meeting in the Netherlands on Nov. 27, although the vote will be nonbinding.

Shares of ASMI were recently up 1.7%, or 35 cents, to $20.45.

ASMI, which recorded $860 million in revenue last year, sells semiconductor-fabrication tools to dozens of chipmakers, including Intel ( INTC), Advanced Micro Devices ( AMD), Samsung and Texas Instruments ( TXN).

ASMI's revenue is split roughly in half between two distinct businesses: so-called "front end" wafer-fabrication equipment and "back end" chip assembly and packaging tools. But the front-end business, in which new products require large investments to develop and can take years before providing a return on investment, has been unprofitable for the past five years, stunting the company's growth.

ASMI has said the front-end business will turn a profit in 2007, and believes the company benefits from important synergies by playing in the two businesses.

With the backing of ISS however, Mellon's argument to split the company may gain more credibility among shareholders.

ISS said that ASMI's contention that current practices creates synergies "remain rather vague, are hard to qualify and are not recognized as such by the market."

The alternative strategy of two-stand-alone businesses seems to be in line with market practices and "would entail compensation in terms of dividends from ASM-PT directly to shareholders, instead of a continually ailing front-end business," wrote ISS in its analysis of Mellon's proposal.

ISS also endorsed a separate proposal to amend ASMI's articles of association which Mellon says will bring the company's corporate governance practices more in-line with Dutch standards.

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