There’s a small fly in the ointment with the pending deal that will see The Stride Rite Corporation acquire Saucony, Inc., but the issue isn’t expected to have any impact on the eventual outcome of the deal, which requires a two-thirds affirmative vote by shareholders. The more interesting piece of the story is contained in the proxy statement filed by Saucony, which indicated that Stride Rite was, at one time, ready to pay more for the company. It appears that SRR realized in January that Saucony’s future bookings were stalling and pulled its initial bid. There was only one other somewhat serious bidder in the process.

A release sent out last week by Fairview Capital Investment Management, which owns of 2.6% of the shares of Saucony, Inc., proclaimed that the firm intended to vote against the proposal to sell Saucony to Stride Rite. Fairview apparently feels the $23 per share sale price is “inadequate.” The firm stated that they felt the deal should have been valued at $33 per share taking into account a 25% control premium and one-half the expected synergies resulting from the acquisition.

Fairview noted that Saucony rejected a $25 cash offer in April when the Stride Rite bid was $23 at that time. The preliminary proxy statement reveals that the Saucony Board rejected the higher offer “because, among other things, the other bidder's bid imposed a requirement that our management rollover and subject to continued vesting a portion of their options and potentially other equity.” Fairview said they believed the higher offer may have been “more favorable for public shareholders.” One of the other items cited by Fairview was the “lack of a strategic review process did not include a special committee of independent directors.” At issue is the “significant insider ownership and dual-class share structure” at the company, which they say may have “favored the interests of management over those of public shareholders.”

Fairview took issue with the “executive benefits” payments that John Fisher and Charles Gottesman will receive in the deal. The estimated $5.3 million payout will effectively compensate them $26 for each of their shares, according to Fairview.

Based on the Executive Benefit Agreement for John Fisher, the president and CEO of Saucony will receive nearly $2.9 million upon change in control of the company. Charles Gottesman, EVP and vice chairman of the company, is expected to receive $2.4 million under the agreement.

What Fairview fails to mention is that the amounts that the two founding family members will receive is less than the amounts in their original executive retention agreements. Fisher would have received $4.66 million under that agreement and Gottesman would have pocketed $3.46 million upon change in control.

The amendment of the payout was due in large part to concerns that the excess amounts would constitute “excess parachute payments” under the Internal Revenue Code.

The firm went on to cite a number of other key objections to the acquisition, including management's preference for a cash transaction and a partner that would invest in growth. They also said Saucony “may not have considered the value of remaining independent.”

Fairview also took issue with Chestnut Securities, the financial advisor that was hired by Saucony, claiming they had “not completed a transaction of this nature in its ten-year existence.” The firm said Chesnut undervalued Saucony by applying a 19.7% discount to Saucony's valuation based on historical trading patterns. They also said that Chestnut's valuation analysis does not consider the value of the cost-saving synergies that Stride Rite expects to achieve, which they said should be shared with Saucony shareholders.  

Based on information contained in the company’s proxy statement, Chestnut contacted 46 potential bidders in the fourth quarter of last year. Twenty-five potential bidders signed confidentiality agreements with Saucony. Seven companies, including Stride Rite, submitted written first round indications of interest in acquiring the company, with six companies proceeding to due diligence. In early January 2005, two bidders, one of whom was Stride Rite, indicated that they each would likely submit second round bids for the purchase of Saucony.

Stride Rite submitted a bid for $25 a share in late January, but two weeks later backed off the bid due to concerns with Saucony’s backlog levels. The other bidder did not submit a second round bid.

Stride Rite came back to the table with the $23 bid in mid-April. The other bidder also re-entered the process a few days later with a $25 per share offer, but it also stipulated that unvested employee stock options convert ratably into the other bidder’s restricted stock or stock option grants. The bid also imposed a requirement that Saucony management rollover and subject to continued vesting a portion of their options and potentially other equity. The bid, which set a 24-hour deadline for acceptance, also contained an exclusivity covenant requiring that Saucony immediately cease any discussions or negotiations with any other party. Management met with Stride Rite again the next day and urged them to increase their bid to $25. SRR came back with the $25 bid in writing, but backed off that price shortly thereafter. The discussions went back and forth between $23 and $25 for a month, but in the end the Stride Rite Board held firm at the $23 per share bid, which includes the immediate exercise of all stock options. The deal is expected to close in Q3.