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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.

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Initiated in 1999 by the CFA Society of New York (at the time known as 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.

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Special Program


Independent Analysis of Shareholder Interests

in a merger transaction proposed by

Providian Financial Corporation



Program Index



The New York Times

August 14, 2005


Gretchen Morgenson

Sometimes Investors Should Just Say No

AT last, investors seem to be awakening to the idea that not all mergers are in their best interests. Given that the current merger mania shows no sign of abating, this epiphany is a mighty good thing.

While most investors greet takeovers with open arms, the fact is that few can be sure that the deals are being struck at the best possible price. Given that the only assessment of a deal's fairness is given by investment banks that are paid when the deal is done, investors are right to wonder whether they could have benefited if their company's negotiators had been tougher.

Now, some investors are doing more than just wondering whether these deals are fair - they are concluding that they are not, and are voting against them. Last month, for example, almost 30 percent of the shareholders in Transkaryotic Therapies, a biotech company, voted against its proposed acquisition by Shire Pharmaceuticals, a British drug company. Only 52.6 percent of the eligible shares were voted in favor of the merger, an unusually small majority.

Investors objected to that acquisition because of its price. After the deal was struck in April, Transkaryotic reported promising data from an important drug trial. This drove up the company's stock, making the acquisition price seem unreasonably low.

And at least one large shareholder of the Providian Financial Corporation has said that he will oppose that company's acquisition by Washington Mutual of Seattle. In the deal, announced in June, WaMu, as it is known, has agreed to pay Providian holders about $6.4 billion, or approximately $19 a share.

The price is only 8 percent above the level at which Providian, the big credit-card concern, was trading when the deal was announced. That is far below the 28 percent premium that Bank of America said it would pay for MBNA, another credit-card issuer.

Shareholders will vote on the Providian merger on Aug. 31. David L. King, a portfolio manager at Putnam Investments, which holds 7.5 percent of Providian's shares, says the price agreed to by the company is far too low. "We have very strong and well-considered opinions about what this company is worth, and $19 is not the answer," said Mr. King, who oversees the Putnam New Value fund. "There are scores of banks domestically and overseas who could buy Providian at a higher price. Let's find out who might be interested rather than selling the company at a price that is inadequate."

Providian's business is turning around, Mr. King asserted. "If you look at the latest quarter," he said, "its default rates have come down to single digits, which is normal, and credit quality is clearly on an uptick." He reckoned that the company was set to earn roughly $2 a share this year. "It baffles me why we should sell out at a price that is less than 10 times that," he added.

MAYBE not so baffling. After all, the interests of executives in most mergers are not necessarily aligned with those of their company's shareholders. Executives of the companies being acquired hit the jackpot in these deals because their stock option grants, restricted shares and retirement plans turn into instant cash. If their companies remained independent, this largess would be accessible only over longer periods.

Consider what Joseph W. Saunders, Providian's chief executive, who joined the company in late 2001, stands to receive if the deal with WaMu goes through.

Let's begin with his options. In 2004, he received 350,000 options exercisable at $13.29 each; that's 16.5 percent of all the options granted by Providian last year. In 2003, he received 1.25 million options with a strike of $7.33; that grant was 16.7 percent of all the options dispensed that year. And in 2002, his first full year on the job, he received 1.1 million options priced at $7.155. That award was 13.7 percent of the total given out by the company during the year.

These are, by any measure, exceedingly generous grants. The median option grant made to chief executives at 409 large companies last year was 5.67 percent of the awards made companywide, according to Equilar, a compensation analysis firm. Mr. Saunders's grants average about three times the median chief executive's.

Isn't it nice that these grants - 1.1 million shares in Mr. Saunders's pocket at last count - can now be cashed in, without delay? All told, the top Providian executives can cash in 3.5 million options and restricted shares if the takeover goes through.

Mr. Saunders will also receive the usual merger payments equal to three times his Providian salary and bonus. And his new employment agreement with WaMu - he will become president and chief executive of its credit card division - entitles him to restricted shares in that company worth $2 million when the merger is completed. He will also get options equal to three times the amount of restricted shares he receives.

Given the increasingly enormous paydays that takeovers can represent for executives, it's a good thing that directors, who owe fiduciary duties to the shareholders they represent, are there to make sure that any deal produces the highest possible price to the owners.

Or are they? After all, when directors have received restricted shares and options for their board service, they stand to receive payouts, albeit smaller ones, in a takeover as well. If they say no to the deals, those payouts are no longer immediate.

Providian's outside directors receive annual retainers of $60,000 for their service. But if they choose to take their compensation in Providian stock, they can receive an additional award of restricted shares equal to 25 percent of the pay they take in stock. Half of the restricted shares can be cashed in after three years and the rest after six years. If the merger goes through, however, these shares can be cashed in at once.

And last year, Providian began adding stock awards worth $100,000 to the annual retainers it pays its directors. Outside directors received 6,582 stock options exercisable at $12 each and 4,166 restricted shares.

Providian's eight outside directors are James P. Holdcroft Jr., a private investor who hails from Wall Street; Ruth M. Owades, president of Owades Enterprises, a consumer marketing enterprise; Jane A. Truelove, a private investor who was a senior vice president at Fidelity Investments; Richard D. Field, a private investor and former executive at Bank of New York; F. Warren McFarlan, a Harvard Business School professor; John L. Douglas, a partner at Alston & Bird, a law firm that has provided services to Providian in the past; Robert J. Higgins, a private investor who was a director at Rhode Island's Department of Administration; and Francesca Ruiz de Luzuriaga, an independent business development consultant who had been an executive at Mattel Inc.

Alan Elias, a Providian spokesman, said that none of the company's outside directors would discuss the deliberations they made to conclude that the deal was fair. "We fully expect the deal to conclude in the beginning of the fourth quarter and we continue to believe that the proposed merger is fair and equitable," Mr. Elias said. He declined to comment further.

Gary Lutin, an investment banker at Lutin & Company in New York, who runs shareholder forums on corporate control matters, says the proposal to buy Providian is a transaction that cries out for an independent, third-party appraisal.

"The investment bankers have significant interests in fees that are purely contingent on the transaction as well as continuing relationships with managements," Mr. Lutin said. "And management and directors of Providian are similarly biased by an option incentive plan that is based on now-discredited concepts of alignment with shareholder interests."

Mr. Lutin has written to Mr. Saunders, asking Providian to cooperate with an objective analyst who will be hired to make an independent assessment of the deal. Mr. Elias said the company would probably not do so. Mr. King, of Putnam Investments, said he favored such an analysis, especially because it would help small investors who don't have the resources to scrutinize a deal.

Taking a vocal stance against a merger is unusual for Putnam, but Mr. King says it will probably take similar actions whenever its analysts conclude that prices proposed in takeovers are too low. "This is an extension of a direction we've been going in for some time," he said.

LET'S hope that other investors, large and small, join in to reject the deal. After all, because the premium in the takeover is so small, Providian shareholders have little downside if it fails. The upsides, meanwhile, are evident: a possibly higher price for the company from another bidder or a rising stock price based on the company's improving fundamentals.

"If investors want to get their fair share of capitalism's benefits," Mr. Lutin said, "they need to make better use of their rights."

In other words, just say no.


Copyright 2005 The New York Times Company




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