A fairness opinion letter that Morgan Keegan issued in support for Warren
Buffett's March bid for Clayton Homes Inc. has raised criticism that such
letters are of little value. In fact, some even say that they are one of
the last bastions of easy money to be made on Wall Street.
The letter, which Clayton Homes requested,
was provided in March to the board of the maker of manufactured houses. It
said that the $12.50 per share offered by the oracle from Omaha in late
March, a 12% premium at the time, was a fair one. Morgan Keegan, an
investment bank based in Memphis and owned by Regions Financial Corp.,
presented its letter on March 21 and a merger agreement was dated April 1.
But now, as shares of Clayton Homes trade
above the offer price at close to $13 and other potential bidders are
considering a higher bid, some say the letter is out of date. At any rate,
it hardly appears to in the best interest of shareholders, who could be
getting more than the acquisition price by simply trading Clayton's stock.
Still, the Clayton board has used the letter as a justification for the
Buffett deal long after the company's share price exceeded the bid price,
"No professional investor pays any
attention to a fairness opinion," said Gary Lutin, an investment banker
who advises shareholders. "Their only real use is by lawyers as evidence
that a board of directors has performed some kind of ritual that courts
recognize as satisfying fiduciary duties."
Moreover, a valuation analysis of Clayton
Homes, performed by Glass, Lewis & Co. LLC, a research firm that provides
advice on issues of corporate integrity and proxies, concluded that the
$12.50 offer was too low and recommended that shareholders reject it. The
report said Clayton could fetch as much as $16 per share.
"We took a fresh look at the fairness of
the deal in light of changed market conditions," said Gregory Taxin, chief
executive of Glass Lewis, "We also evaluated Morgan Keegan's process and
fairness letter and we concluded that there were some things about their
analysis that we took issue with."
Taxin said that the opinion was rendered
during the Iraq war, when the markets were depressed. After the war, stock
prices of Clayton's peer group rose 40%, and Clayton's stock rose only to
above $13, held back by the $12.50 cash bid, bankers said. The letter
given on March 21 to Clayton's board provided "substantial value to the
board at the time, but the world has since moved and changed," Taxin said.
Despite the run-up in prices and the
objection to the bid by some institutional shareholders, Clayton's board
stood by the deal, which had a no solicitation clause forbidding Clayton
from seeking other bids. And last week, under pressure from another
potential bidder, Clayton's board opened the bidding for a two-week
period. In return for allowing the two-week window, Clayton Homes will pay
Buffett's Berkshire Hathaway $5 million. Cerberus Capital Management is
expected to make a bid.
Nevertheless, bankers point out that
fairness letter have served as a convenient insurance policy that shows
the board tried to get a fair price for the company. They also say that
these pricey letters-which cost as much as $1 million or more-are one of
the best kept secrets for making easy money among investment banks. "They
are not worth the paper they are written on," said one banker.
Morgan Keegan, which charged just $250,000
for its letter, declined to comment. A spokeswoman said the bank "does not
comment on our clients' business."
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