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



SF Gate       

Providian takeover contested
- Kathleen Pender
Thursday, August 25, 2005

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 acquirer's offer.

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 securities lawyer.

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 Taxin.

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 merger.

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."

Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at

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©2005 San Francisco Chronicle




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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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