The Shareholder Forum

Special Program


Independent Analysis of Shareholder Interests

in a merger transaction proposed by

Providian Financial Corporation

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Providian Program Home Page

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

June 19, 2005


Gretchen Morgenson

Yes, They Can Say No to a Merger

IN the six months since the Symantec Corporation, a leading provider of Internet security software, announced its plan to acquire Veritas Software, a maker of storage products, investors have done nothing but boo and hiss the buyout. Reaction to the deal has been so virulent that investors have dumped Symantec shares, taking the value of the all-stock deal down to about $9 billion from about $14 billion at the time it was announced.

While Mr. Market has already made his views clear, shareholders of both companies will vote yea or nay on the combination this Friday. Only then will we see whether investors still holding Symantec shares have the stomach to vote against management, or whether they will support it as institutional holders almost always do.

Under the terms of the deal, Veritas shareholders will receive 1.1242 shares of Symantec for each share they tender. Because Symantec's stock is trading 21 percent lower than it was when the merger was proposed, this may be the rare case in which shareholders could actually see gains in their stock if they reject the deal.

The Symantec-Veritas deal is unusual in that way, but it is just like all the others in a broader sense: it illustrates why mergers are a dysfunctional cog in the capital allocation machine. That is, even though the deals rarely result in significantly more profitable companies, institutional investors almost always vote for them because they are forced into a corner: a "no" vote usually leads to a big drop in the stock price.

Academic research suggests that after they are completed, large, stock-for-stock mergers like the Symantec-Veritas deal rarely produce companies that are outstanding performers. For that matter, few mergers of any kind lead to significantly more profitable companies.

Yet in a triumph of hope over experience, investors keep rubber-stamping the deals. Data collected from 1,950 mutual funds by Thomson Financial proves it: in the 12 months through June last year, funds voted against mergers only 1.5 percent of the time.

It has been ever thus, of course. But because corporate combinations are producing increasingly obscene payouts for the executives involved, institutional shareholders who have fiduciary duties to the folks whose money they oversee should be questioning management harder about the rationales for the deals.

The award for most stupefying payout in a merger, for example, goes to James M. Kilts, chief executive of Gillette, who joined the board of The New York Times Company last week. Mr. Kilts stands to receive $165 million when Gillette is sold to Procter & Gamble; shareholders vote on the deal next month.

The fact is that executives and even company directors have so much to gain in some of these deals that their sales pitches to shareholders should be discounted entirely. Unfortunately, few portfolio managers have time to analyze thoroughly the prospects for these mergers.

There are no huge executive windfalls in the Symantec-Veritas combination. But Veritas executives will be able to cash in all their options immediately under the deal and get new employment agreements that include sign-on bonuses and additional option grants. Sign-on bonuses for eight top executives at Veritas will total $13.4 million; they will also receive an aggregate 862,500 Symantec stock options.

BUT other aspects of the deal have led many shareholders to conclude that it is a stinker. For example, Symantec's projected annual growth rate of 17.5 percent over the next five years is considerably more than the 13 percent that is expected from Veritas. If the companies combine, investors fear that Symantec's torrid growth will cool.

"One might fairly ask, why did the management team and board approve this?" said Gregory P. Taxin, the chief executive of Glass Lewis & Company, an institutional investor advisory firm that has urged Symantec shareholders to vote against the deal. "This is a classic case of a really well-run, well-respected business with a great management team that was looking around for things to buy for the sake of being bigger."

Even Symantec has not claimed that the deal would generate gigantic synergies; it estimated that $100 million in savings could be achieved by eliminating overlap between the two companies. Given that the deal's costs could be $50 million to $75 million, those savings would vanish quickly.

The dearth of synergies in the Symantec-Veritas proposal underscores one of the deal's main problems, at least in Glass Lewis's view: the two companies' products are so different that they should not be combined at all.

A rival investor advisory firm, Institutional Shareholder Services, has recommended that Symantec shareholders approve the deal. Both services have advised Veritas shareholders to vote yes.

Symantec holders who didn't like the deal have undoubtedly sold their positions by now. Unfortunately for those who remain, there is little information to help them decide how to vote. Sure, they have management's pitch. But how do they vet it?

For instance, while Lehman Brothers has said the deal is fair to Symantec shareholders, and Goldman Sachs has said the same for shareholders at Veritas, these views have to be looked at skeptically. Such opinions are paid for by the companies doing the deals, so they cannot be viewed as disinterested.

Glass Lewis's analysis found that there were a few other flaws in the fairness opinion provided to Symantec by Lehman Brothers. One was that the past software deals used by Lehman as a benchmark for the price Symantec is paying were not truly parallel; they were acquisitions by large companies of smaller or private firms, which are typically more expensive than deals involving two big public companies.

Executives at both companies declined to discuss the merger. A spokeswoman at Lehman also declined to comment.

Given the current merger wave, the need to vet management's sales pitch in a deal is a growing problem for shareholders. But it can be solved.

Gary Lutin, an investment banker at Lutin & Company who conducts shareholder forums on corporate control matters, said institutional investors should hire truly independent firms to assess the deals and force companies into reimbursing shareholders for the analyses. In other words, shareholders don't have to feel that they have no viable alternatives other than voting yes or selling the stock.

"Companies need to support activities by investors that provide other alternatives to get the information they need in a merger," Mr. Lutin said. "Investors could get together and say that if management does not provide the funding for them to get an independent analysis, then they will vote against the deal. I'm sure management would be willing to accommodate their holders' request."

IT is too late for shareholders of Symantec to strike such a bargain with its executives. But there will be many opportunities for other shareholders in the future.

Shareholders should exercise their rights to receive an unbiased point of view about something as important as a merger. After all, it's only the future of their company that is at stake.






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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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