Debate over Providian appraisal rights heats up
Fri Aug 26, 2005
03:15 PM ET
CHICAGO, Aug 26 (Reuters) - The debate over Washington
Mutual Inc.'s (WM.N:
Research) proposed buyout of
Providian Financial Corp. (PVN.N:
Research) heated up again on
Friday with one investor advisory service urging investors to
disregard the advice of a rival.
Proxy Governance, a Vienna, Virginia-based firm that
researches takeovers for institutional investors, warned Providian
shareholders unhappy with the $6.45 billion deal that they would be
making a costly and risky bet if they heeded the advice of San
Francisco-based Glass Lewis & Co., another takeover research firm.
During a conference call with clients late Thursday,
Glass Lewis & Co. reiterated a recommendation it made last week that
Providian shareholders consider exercising their rights under Delaware
law to have a court determine the fair value of their shares rather
than voting in favor of the deal.
Those rights, known as appraisal rights or
dissenters rights, essentially permit shareholders to opt out of the
terms of the deal. Those who choose to do so agree instead to accept
what a Delaware court determines to be a fair price.
Glass Lewis & Co. said the median premium that
dissident shareholders have received as a result of the process in the
past was 20 percent above the deal price. But it acknowledged that the
process was "somewhat convoluted" and should be "approached with some
Washington Mutual's proposed purchase of Providian,
which inaugurated what has become a summer of consolidation in the
credit card industry, has turned into one of the year's more
controversial deals because Washington Mutual's $18.71-a-share offer
price represented a 4.2 percent premium to the stock's last closing
price prior to the announcement.
Several shareholders, including Putnam Investments,
which controls 7.5 percent of Providian's shares, believe the price is
too low and have come out against the transaction, as have at least
two leading investor advisory services: Glass Lewis & Co. and
But Proxy Governance, which like Institutional
Shareholder Services has recommended the merger be approved, said that
by throwing the issue to the courts, Providian shareholders were
exposing themselves to "a not insignificant possibility" that they
would get a lower price for their shares than Washington Mutual is
It warned that while Delaware does not have a
definitive approach to determining share value in such proceedings, it
requires the appraisal to be based on the company's value as a
"Any value attributable to synergies or benefits
from the merger itself -- value generally reflected in a takeover
price -- is subtracted to obtain the 'fair value' for appraisal
purposes," Proxy Governance warned.
What's more, Proxy Governance said that if enough
shareholders pursued the appraisal option, the number of shares needed
to approve the merger might not be delivered next Wednesday, when
shareholders are scheduled to vote on the deal. If the deal is
aborted, it argued, Providian shares could slide lower.
"We believe that advising a vote against a merger as
a general recommendation for all shareholders -- with the expectation
that the transaction will be approved and provide the opportunity for
price improvement in the courts -- is not prudent," Proxy Governance
"It is especially imprudent in this case, where any
benefit from appraisal rights seems elusive."