The Shareholder Forum

Special Program


Independent Analysis of Shareholder Interests

in a merger transaction proposed by

Providian Financial Corporation

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Program Summary

(August 10, 2005)

     In response to publicly expressed investor concerns about the pricing of a merger transaction proposed by the management of Providian Financial Corporation (“PVN”), a special “Forum” program has been initiated for the limited purpose of arranging an independent analysis of shareholder interests.

     The program is intended to develop a broadly applicable process for providing public shareholders with objective, professional analyses of transaction proposals, as an alternative to the current practice of relying on “fairness opinions” presented by a transaction’s proponents.

     Anyone with an interest in Providian or in the general objective of assuring informed investment decisions  is encouraged to participate in the program, which will be managed by Gary Lutin according to the usual Forum policies.

August 10, 2005



The New York Times

May 29, 2005

Gretchen Morgenson

Mirror, Mirror, Who Is the Unfairest?

ROOTING out conflicts of interest on Wall Street has become a full-time job for securities regulators in recent years. Thankfully, some long-needed changes have been made to research and sales practices at brokerage firms, banks and mutual fund companies.

But one conflict lives brazenly on, safe from even the most assiduous reform efforts. That enduring unfairness is related to, of all things, the fairness opinion.

Fairness opinions are produced by Wall Street banks and are intended to assure the directors of companies involved in a merger, acquisition or other deal that its terms are fair to shareholders.

But the opinions can be problematic. That's because the bank affirming the fairness of the transaction is often the same one that proposed the deal - and that stands to reap millions in fees if it goes through. When J. P. Morgan Chase paid $58 billion to acquire Bank One last July, the fairness opinion was supplied by - who else? - J. P. Morgan Chase.

However laughable they may be, fairness opinions continue to be used to justify transactions and to provide legal cover for directors fearful of being sued if a deal goes bad.

At least some regulators are beginning to awaken to the conflicts that fairness opinions pose. The NASD has asked its members and the public for comments on the practices surrounding the opinions and may propose new rules related to their use.

In Massachusetts, William F. Galvin, the secretary of the commonwealth, is investigating the fairness opinions supplied by Goldman Sachs and UBS, the two investment banks advising Gillette, which is the subject of a $57 billion offer from Procter & Gamble. Merrill Lynch provided the fairness opinion to Procter.

Mr. Galvin said he had subpoenaed documents relating to these fairness opinions out of concern that the deal might not be, well, fair to Gillette shareholders. "For us here in Massachusetts, this is a very big deal because many of the shareholders are residents," he said. "The fairness of the valuation is at issue. In the proxy statement, Goldman was credited with bringing the deal together. When one of the fairness opinion providers brought the deal together, how objective could their opinion be?"

A spokesman for Goldman Sachs declined to comment. UBS's spokesman said, "We are confident in the advisory services provided to our client."

As a part of his investigation, Mr. Galvin asked Rajesh K. Aggarwal, a professor at the University of Virginia who specializes in corporate governance and executive pay, to analyze the fairness opinions.

Professor Aggarwal wrote in his study that the opinions were reasonable and valid but that there were "substantial discrepancies" between the public and private statements the companies have made estimating the merger's value.

For example, the companies' public projections on the revenue and cost "synergies" they expected to achieve as a result of the merger were about $14 billion to $16 billion. But internal company documents, Professor Aggarwal said, put the estimates at $22.1 billion to $28.1 billion.

In addition, he said, there seemed to be errors in the way the merger's value synergies were calculated - mistakes that underestimate the value of the deal. He concluded that by underestimating the value of the synergies, the deal would be more beneficial to Procter & Gamble shareholders than to Gillette's owners.

Eric Kraus, a Gillette spokesman, said the company had no comment on Professor Aggarwal's analysis. "Virtually no financial expert thinks the deal is anything but excellent for Gillette shareholders," Mr. Kraus said, adding that Gillette was cooperating with Mr. Galvin's inquiry.

Procter & Gamble said it believed that the opinion provided by Merrill Lynch was fair.

Shareholders of both companies will have the last word. They are scheduled to vote on the merger in June.

Speaking generally, Professor Aggarwal said: "There's a sense that whatever the two parties agree to must be fair. But management has no interest whatsoever in having independent third parties looking at the details of any transactions, and boards historically weren't going to question the judgment of management. So the issue here is the one party that doesn't participate in the negotiations - the shareholders."

But shining the spotlight on fairness opinions, as Mr. Galvin has done, is indeed a public service.

And surely, in a time when corporate directors are being held increasingly accountable for their actions, they ought to be concerned about the conflicts that make many fairness opinions so dubious.

"I think we're going to see more boards hiring independent parties to evaluate transactions, to evaluate the performance of management and to evaluate compensation contracts," Professor Aggarwal said. "I think that if one of the high-profile deals that are in process now were to blow up because it looked like the board didn't do enough investigation on behalf of shareholders, you would absolutely see a lot more use of third parties to make sure the deal is good for shareholders."

When it comes to hiring firms that can conduct truly independent reviews of deals, directors have had few choices.

But a new firm, set up by two experienced Wall Street bankers, hopes to change that.

The firm, Pirie, Goldsmith & Associates of New York, offers independent fairness opinions on mergers and acquisitions, as well as on asset sales, executive compensation and other issues, said Robert S. Pirie, a former partner at Skadden, Arps, Slate, Meagher & Flom and, from 1987 to 1992, the chairman of Rothschild Inc., an investment firm. "To be able to look the lawyers in the eye and say, 'We hired someone who had nothing to do with the deal, who looked at it and said in their opinion it's fair,' if I were a director I'd be very happy to have that," Mr. Pirie said.

Gerald Goldsmith, a former top executive at Rothschild, is the firm's other founder; its advisory board members are Paul W. MacAvoy, professor of economics at Yale, and Peter Scanlon, former chairman of Coopers & Lybrand.

While the established Wall Street firms may snicker at the creation of such a firm, Paul A. Volcker, the former chairman of the Federal Reserve, applauded the idea of an organization devoted to the issuance of unbiased fairness opinions. "If there was ever going to be a market for this kind of thing it will be now," he said. "It strikes me that it would be very valuable. A lot of mergers are promoted for the benefit of those involved."

And all too often, shareholders are the last on that list.





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This public program addressing shareholder interests in Providian Financial Corporation (PVN) was initiated with the leadership support of Putnam Investment Management, and according to the Forum’s stated "Conditions of Participation" is open to all shareholders of the subject company and to any fiduciaries or professionals concerned with their decisions. In all cases, each participant is expected to make independent use of information obtained through the Forum, and participation is considered private unless the party specifically authorizes identification.

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