UPDATE 1-Providian debate
shows dealmaking art, not science
Mon Aug 29, 2005 05:32 PM ET
(Adds Providian's share performance since the
deal was announced and byline)
By James B. Kelleher
CHICAGO, Aug 29 (Reuters) - When
Washington Mutual Inc. (WM.N:
offered to buy Providian Financial Corp. (PVN.N:
for $6.45 billion in early June, it kicked off what turned out
to be a summer of consolidation in the U.S. credit-card
It also kicked off a debate that
has demonstrated -- in more ways than one -- the extent to which
dealmaking remains an art, not a science.
At the heart of the debate is a
seemingly simple question: Is Washington Mutual's $18.71 a share
offer price for Providian fair?
The answer is now in the hands of
Providian shareholders, who will vote on the merger on
The trouble is, even the investor
advisory firms that analyze deals for a living can't agree
whether shareholders should approve or reject it.
That's not surprising, says
Robert Bruner, dean of the Darden School of Business at the
University of Virginia. Intrinsic worth, like beauty, is often
in the eye of the beholder.
"You can't see true value; you
can only estimate it," says Bruner, whose research on corporate
mergers and acquisitions is distilled in his latest book: "Deals
Because different analysts use
different tools to make their estimates, sometimes a deal that
doesn't measure up by one yardstick looks considerably better by
In the case of Providian,
opponents of the deal seem to be focused largely on one thing:
Washington Mutual's offer price expressed as a premium to
Providian's share price.
The savings and loan's offer
represented a 4.2 percent premium to the credit-card company's
closing stock price the day before the deal was announced.
Almost as soon as the terms were
announced, some Providian holders were grumbling about the
paltry premium. But the grumblings grew louder when, 3-1/2 weeks
later, Bank of America Corp. (BAC.N:
announced it would buy MBNA Corp. (KRB.N:
for $35 billion, or about $27.50 a share -- a 30 percent premium
to its most recent closing price prior to the announcement.
Sean Egan, a principal at
Egan-Jones Proxy Service, an investor advisory service that has
urged Providian shareholders to reject the deal, puts the
critics' case bluntly:
"The marketplace has accepted the
premium over stock price as being a fairly good indicator," Egan
says. "And by that measure, the amount being paid for Providian
Indeed, shares of Providian fell
in the days immediately after the deal was announced because, as
Institutional Shareholder Services put it, "the market had
anticipated a higher acquisition premium."
The shares have since recovered
and closed Monday at $18.47.
A DIFFERENT VIEW
Supporters of the deal, on the
other hand, are focused on something else altogether: Washington
Mutual's offer price as a premium to Providian's receivables.
"With credit card companies,"
says Gene Capello, a managing director of policy at Proxy
Governance, one of two investor service firms urging investors
to support the deal. "You have to give receivables a bigger
spotlight because that is what their business is all about."
In the case of Providian,
Washington Mutual's price represented a 17.6 percent premium to
receivables. In the case of MBNA, Bank of America's offer price
represented a 22 percent premium to receivables.
That's still a sizable gap, to be
sure, though smaller than the gap between share price premiums
in the two deals.
Proxy Governance and
Institutional Shareholder Service, the other investor advisory
service recommending investors approve the deal, say the gap is
warranted, however, because not all receivables are equal.
Simply put, MBNA not only has more customers than Providian, it
also has better customers -- customers who are more likely to
pay on time and less likely to default.
But though the analysts parsing
the Providian deal used different tools to measure fair value,
they all relied on their noses when assessing the post-deal
change-in-control payments that Providian managers will enjoy
under the deal -- even though those managers won't lose their
jobs and will get new employment and options contracts at
ISS, Proxy Governance, Glass
Lewis, and Egan-Jones all agree that the payouts create at least
the appearance of a conflict of interest. And they wonder how
the executives and bankers who put the deal together could have
been so insensitive to those impressions.
"(It) gives the management team
incentive structures different from those of shareholders," says
Greg Taxin, the president of Glass Lewis & Co. "It makes doing a
transaction more attractive to the executives than doing a
transaction might be to a shareholder."