Sunday, September 04, 2005

Ulterior motive There is a movement afoot to stop the acquisition of Providian bank by Washington Mutual, announced a few months ago. According to a New York Times article "Sometimes Investors Should Just Say No", 8/14/2005), a number of major stockholders (such as mutual fund company Putnam Investments) feel that the sale severely undervalued Providian. That's come up especially since Bank of America was far more generous in buying MBNA, a similar deal for credit card assets. The point is that the executives and directors of Providian were in a rush to line their pockets more than they were interested in enriching the stockholders. After all, the interests of executives in most mergers are not necessarily aligned with those of their companies' shareholders. Executives of the company 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. The article enumerates the windfall that hit Joseph Saunders, CEO of Providian, if the merger goes through. These include: 1.1 million shares of Providian in the form of options can be cashed in at once (over $19 million) Merger payments equal to three times his Providian salary A new, high-paying job for Washington Mutual (as president of the credit card division) at a hefty salary as long he wants it $2 million in new, restricted shares in Washington Mutual The directors of Providian's board won't get do richly rewarded, but they will be sent off with a nice payday as well. As we have often noted, these factors cannot help but get in the way of good decision-making. And synergy and investor value are not always the main motivators. 2:41:51 PM

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