Are These Shareholders Being Frozen Out?

No matter what some nostalgic baby boomers may tell you, Get Smart was a truly dumb TV show. It did, however, come up with one brilliant gag, the "Cone of Silence." This clear plastic dome descended over Maxwell Smart, Agent 99, and their fellow spies to keep secrets from the wrong ears. Dumb, but so dumb it was funny.

Less amusing is the cone of silence too often used these days by public companies. The latest Case of the Corporate Cone centers on a small but promising Santa Barbara (Calif.) outfit called Fidelity National Information (Solutions FNIS ) Solutions. FNIS sells real estate database tools and software, notably Paragon MLS, which helps agents troll multiple listing services. FNIS also is bent on revolutionizing appraisals. Instead of sending appraisers out to size up houses, FNIS reckons their value by plying mathematical models over oceans of market data. Wall Street sees FNIS' profit this year growing 32%, to $1.28 a share, on $503 million in revenue.

In May, though, something happened. FNIS shares leaped over $26 from under $20. Fidelity National Financial (FNF ) the nation's top title insurer, with $5.1 billion in revenue last year, owns 66% of FNIS. Having recently acquired another real estate data company, FNF decided it also wants to own all of FNIS by buying out public shareholders. For each of their shares, FNF is offering some of its own stock, lately worth about $25 per FNIS share. A fair bid? Maybe, particularly given the nice premium over FNIS' pre-offer price. Yet if you think about it, you may start wondering why FNF would pay a penny more than it might get away with. That, after all, would only cost its own shareholders.

Dwell on it a little more, and you realize that as FNIS' controlling shareholder, FNF probably enjoys the best possible fix on the key variable that will determine the winner in this deal -- FNIS' future earnings. If profits grow more rapidly than the market now expects, that's all to the good for FNF, while FNIS shareholders will have sold out too soon, too cheap. Standing in the way of such an outcome are four men, FNIS' independent directors. They have formed a special committee to consider FNF's offer. (Seven men make up the entire FNIS board, but three -- Chairman William Foley II, CEO Patrick Stone, and FNF director Cary Thompson -- owe first allegiances to FNF and so now are out of the FNIS loop.)

Will the independent directors do a good job? Early signs are not encouraging. The directors released word of FNF's bid at 6:31 p.m. EDT on Friday, May 23. I don't know about you, but at that moment I was already into my Memorial Day weekend. After a few bare details and boilerplate assurances that the special committee would do the right thing, down came the Cone of Silence. Through June 30, FNIS had issued no more news. Nothing about who is on the special committee or who is its chairman, lawyer, or investment banker. Not a word on how it will evaluate FNF's bid, what alternatives it's pursuing, or when it will report to investors. Via phone, e-mail, and a message passed on by FNIS Chief Financial Officer Neil Johnson, I tried to reach independent directors in hopes of learning more. No luck. "They have kind of 'close-knit' themselves," Johnson told me.

Willie Davis, a onetime football star and president of radio company All Pro Broadcasting, is the most experienced of the four. He sits on the boards of 10 other public companies, plus Strong Funds and two universities. Richard Freeman is an investment manager who in March left his position at Century Capital Management. Earl Gallegos is a data-processing consultant. Richard Mendenhall, who joined the board in January, owns real estate agencies in Missouri and served in 2001 as president of the National Association of Realtors. At last report, he had no stock or options in FNIS. The others held options, but only Freeman owned FNIS stock outright, a total of 1,663 shares.

If I held stock in FNIS, I would like to hear these guys hollering: "Look! FNF wants your shares. But we're on your side. Here's our plan for protecting your interests -- and, by the way, anybody want to make a counteroffer?" Instead, the only sound has been silence. You could make a TV show about FNIS and call it Get Dumb.

By Robert Barker

    Before it's here, it's on the Bloomberg Terminal.