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
 

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.


 

 

 

 

 

Inquiries, requests to be included in email distribution lists, and suggestions of new Forum subjects may be addressed to inquiry@shareholderforum.com.

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.