June 15, 2008
Another Hatchet Job By Morgenson
In today's business section of the New York Times, Gretchen Morgenson writes, under her op-ed title "Fair Game", of the buyout by a private equity firm, TPG, of the otherwise failing savings and loan bank Washington Mutual. It is total hatchet job. TPG is pumping cash into the bank in exchange for a potential controlling interest (if it exercises all the warrants in the deal) and a board seat. In the latest quarter the bank lost $1.1 billion and sits on a $10 billion in non-performing mortgage loans, which may increase when interest rate resets hit in less than two weeks. One wonders what TPG sees in the bank. It bought the common stock in the package for $8.75 and it is trading today at $6.66. The strike price on the purchase warrants is $10.65, now well out of the money. Morgenson has found disgruntled shareholders who do not like the "extreme dilution" and feel "forced" to vote for the deal (under NYSE rules). She also, in typical fashion, chronicles the salary of the CEO. It took no bonus last year and was paid $1 million in cash, but the year before he took a bonus of $4 million.(and the firm "declined to comment.") Perhaps the board should have negotiated a better deal or perhaps it should have done a "rights offering" that "forced" existing shareholders to exercise in the money options or suffer dilution.
Here is the better story. Washington Mutual is in jeopardy of bankrupt, in which the shareholders get nothing. They do not have any bargaining power when seeking a cash infusion, which is needed now, not later. They took the best deal they could get. A rights offering takes longer and has historically been a declaration of defeat that hammers stock price. Shareholders should be disappointed and they are not blameless -- they invested in the company and voted in favor of its leaders. The vote is "forced" because it is a good deal.
Morgenson mentions "penalties" if the vote fails and suggests the vote is coerced. Her own analysis makes no sense. The penalties mentioned are stock dividends to TPG (on the preferred in the package I assume) and a reduction in price in the warrants. Put if the deal fails a vote TPG cannot get the stock and warrants it intends to purchase -- so how does this penalty work? I assume the dividend and warrant package is scaled back to less than a 20 percent voting interest, but Morgenson does not say.
A true hatchet job.
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Before you blog about a topic, you should know enough to have done at least SOME research. Read Washington Mutual's proxy (or the 8-K) concerning the TPG capital offering before you make any judgments about a reporter's piece.
Posted by: Tom Hanks | Jun 16, 2008 8:34:40 AM
The proxy statement does not change my views. TPG paid 7.2 billion and wants common shares for $8.75 and the right to buy another large block of shares for $8.75. Shareholders must vote to approve any stock dilution of the common over 20 percent under NYSE rules, which would take time, and the company needed the money now. So TPG agreed to give the cash in exchange for less than 20% of the common and for a special kind of contingent, non-voting preferred stock and a special kind of warrant. On approval the preferred converts to common and the warrants vest; if the shareholders fail to approve the dilution the warrants turn into more special preferred stock and all the special preferred stock pays very high dividends (the cost of not holding a larger than 20 percent stake of common at $8.75 a share). Since the sale at $8.75 now looks very good, shareholders should approve and hope, hope that TPG exercises the warrants. Hardly coercion.
Posted by: Oesterle | Jun 18, 2008 2:01:07 PM