The Shareholder Forum

supporting investor interests in long term enterprise value

 

Purpose & History of Services

The Shareholder Forum

The Shareholder Forum supports investor interests in corporate enterprise value with services that require independence – and that may benefit from the Forum’s network resources and recognition for advocacy of long term investor interests – to assure a definition of relevant issues and fair access to information that can be relied upon by both corporate and investor decision-makers.

The policies that provide a foundation for the Forum’s marketplace functions have been carefully developed and tested to allow any investor to participate in its communications, either anonymously or visibly, without acting in concert. Established originally to accommodate professional fund managers, this independent moderator function has proved to be consistently effective in managing orderly processes of issue definition for rational analysis by fiduciaries who are responsible for informed decisions.

Initiated in 1999 by the New York Society of Security Analysts with lead investor and former corporate investment banker Gary Lutin as guest chairman to address the professional interests of its members, and independently supported by Mr. Lutin since 2001, Forum programs have achieved wide recognition for their effective definition of important issues and orderly exchange of the information and views needed to resolve them. The Forum's ability to convene all key decision-making constituencies and influence leaders has been applied to subjects ranging from corporate control contests to the establishment of consensus marketplace standards for fair disclosure, and has been relied upon by virtually every major U.S. fund manager and the many other investors who have participated in programs that addressed their interests.

Currently important applications of the Forum’s independent position include the support of corporate managers who wish to provide the leadership expected of them by responding to activist challenges with orderly reviews of issues relevant to long term investor interests.

Requests for Shareholder Forum consideration of support may be initiated confidentially by any investor or by the subject company, or by the professional advisors to either.

 

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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Publicly open programs of the Shareholder Forum are conducted for free participation of all shareholders of a subject company and any fiduciaries or professionals concerned with their decisions, according to the Forum’s stated "Conditions of Participation." 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.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.