Proxy advisory firm Glass, Lewis & Co. considers Washington
Mutual's buyout offer for San Francisco's Providian Financial so
inadequate that it is advising Providian shareholders to vote
against the merger and consider exercising their right to ask for a
court appraisal of the credit card company.
The unusual move is the latest twist in what is becoming a hotly
contested takeover. Putnam Investments, Providian's largest owner,
has said it will vote against the deal when it comes up for
shareholder approval Wednesday.
Two proxy advisory firms have endorsed the deal with reservations
and two are recommending against it. Washington Mutual was offering
only a slight premium over Providian's share price before the
acquisition was announced, and there is little evidence Providian
shopped for a better deal.
In most states, shareholders who think their company is being
bought on the cheap can vote against the deal or abstain from voting
and ask for a court appraisal. This right is not widely used because
it can be costly, time- consuming and risky.
Shareholders usually have to hire lawyers and expert witnesses to
battle the company's lawyers and witnesses, and a decision usually
takes a year or two, maybe more.
Such a challenge does not prevent a merger from going through if
a majority of shareholders approve it. Shareholders who vote yes get
whatever price the acquiring firm offers.
But shareholders who request the appraisal eventually get what
the court decides the company was worth, which could be more or less
than the offer price.
Glass, Lewis, also based in San Francisco, is holding a
conference call today to explain this process to its clients, which
are institutional investors such as pension and mutual funds.
"A number of our clients are considering exercising their
appraisal rights," says Greg Taxin, president of Glass, Lewis.
Such challenges are usually mounted by a large shareholder or
group of shareholders who can foot the legal bills, says John
Coffee, a securities law professor at Columbia University.
The court might or might not order the company to reimburse
shareholders for some or all of their expenses.
Individual investors who exercise their right to an appraisal are
usually folded into the same case.
Shareholders typically exercise this right when acquirers offer
only a slight premium over the target company's stock price. This
reduces the perceived risk that the court will set a value below the
Courts don't really look at the takeover premium when they
determine what a company is worth. In recent years, courts in
Delaware (where Providian is incorporated) have based their decision
on a company's discounted cash flow or the present value of its
future cash flows, says Coffee.
"To threaten an appraisal action can sometimes pressure the
suitor to pay more money," says Steve Sidener, a San Francisco
Last year, when AXA, the French insurance company, was trying to
acquire life insurer MONY Group of New York, it received demands for
appraisal rights from shareholders claiming to own almost 17 percent
of MONY stock. After postponing a shareholder vote and slightly
sweetening its offer, AXA barely won its takeover bid.
Most of Providian's largest shareholders, including Franklin
Templeton, Barclays Global Investors and TIAA-CREF, declined to say
how they will vote.
The California Public Employees' Retirement System has not yet
decided how it will vote, says Edward Fong, a spokesman for the
pension fund. CalPERS owns about 1.5 million shares of Providian,
worth about $27 million, and 4.8 million shares of Washington
Mutual, worth about $200 million.
Taxin says the merger will be good for Washington Mutual's
shareholders but bad for Providian's. If an investor owns both,
Taxin says his firm will recommend that they abstain from casting a
ballot in Providian's vote so that the merger can go through, then
exercise their right to an appraisal, hoping to get a higher price
for their Providian stock.
According to Glass, Lewis, Washington Mutual's offer works out to
about $18.71 for each Providian share. This represents a premium of
about 4.4 percent over Providian's closing price one day before the
announcement and an average of 12.5 percent during the 30 days
prior. "We think in the merger market it's worth $21 to $24," says
Providian did not return phone calls.
In its review of the merger, Egan-Jones Proxy Services also views
Washington Mutual's offer as inadequate and recommended that
Providian shareholders turn it down.
Egan-Jones said it was "critical of the fact that the company
failed to approach other potential acquirers which might well have
agreed to pay a higher consideration value."
It was also "troubled that some of Providian's executive officers
and directors have interests in the merger and have arrangements
that are different from, or in addition to, those of Providian
stockholders generally and which in particular would likely
financially benefit them."
Providian's top management team is getting lucrative change of
control payments, including accelerated vesting of stock options and
restricted stock. These are similar to the golden parachutes top
executives typically get when they lose their jobs following a
But most of Providian's management team, including President and
CEO Joseph Saunders, have been offered high-level jobs at Washington
Mutual. "They are getting a golden bungee," says Shirley Westcott, a
managing director with Proxy Governance.
Her firm, as well as Institutional Shareholder Services, another
proxy advisory firm, were both concerned about these golden bungees
and the fact that Providian did not seem to make much effort to
solicit a higher offer.
Nevertheless, both are recommending that Providian shareholders
vote in favor of the offer, mainly because it appears fair based on
valuations such as the premium Washington Mutual is paying for
Providian's credit card receivables.
"Is it appropriate for (the executives) to be receiving these
payments? We do not advocate it," says Muir Paterson, co-head of
merger research with ISS. However, he says, "one has to look at how
this is priced on the fundamentals."
His firm's conclusion: "While we recognize that the offer value
may not be the maximum price that could have been achieved, we do
believe that the offer value falls within an appropriate range."
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