Columbia Equity Trust Inc. (NYSE:COE) entered into a definitive merger agreement with JPMorgan Asset Management's Special Situation Property Fund whereby they would be acquired for $502 million (or $19 per share). The agreement was announced back in December while the date for the vote is set for Tuesday, February 27, 2007. The story gets interesting because two large shareholders have recently voiced concerns that management intentionally failed to consider four competing unsolicited bids in order to secure lucrative compensation agreements and to ensure their own job safety. The company fired back in their proxy arguing that JPMorgan understood their "complex" business and offered a low enough termiantion fee to enable any other bidders to participate. In reality, there are far more complex REIT transactions than this one (including the current Equity Office buyout) and the risks associated with efforts to interfere in a definitive merger situation may be too great for other bidders.

The first large shareholder to voice concern was 9.4% holder Arnhold and S. Bleichroeder Advisers, LLC. On January 8, 2007, the hedge fund filed a Schedule 13D with the SEC containing a letter outlining its concerns. According to the letter: "Given the combination we have here of lucrative management compensation agreements, an acquirer that was already affiliated with the company, and the complete absence of a competitive bidding process, we are hopeful that the parties to the transaction will agree that implementing a 'go-shop' period is the appropriate course of action from a fiduciary point of view. As holders of approximately 9.4% of the outstanding shares of Columbia, we currently intend to withhold our support for the proposed merger until we are satisfied that company is being sold for the highest possible price that any market participant is willing to pay for our shares."

The second shareholder to voice concern was 9.1% holder Ramius Capital Group L.L.C. On January 9, 2007, the hedge fund filed their own Schedule 13D echoing the complaints issued a day earlier by Bleichroeder. The fund elaborated on the four ways in which the board had failed to protect shareholder interests:

1. The Board made an error by not shopping Columbia to more than one buyer. It is inexplicable that the Board did not instruct Columbia's investment banker, Wachovia Securities ("Wachovia"), to encourage "Company A", "Company B", "Company C" or "Company D" (as those entities are indentified in the Proxy Statement) to make a bid for Columbia while Columbia was negotiating with SSPF/CET. Columbia was not subject to any exclusivity arrangement with SSPF/CET at the time and these entities had previously expressed enough interest in Columbia to warrant a belief that one or more may have competed with SSPF/CET. Moreover, we believe that Columbia's management and Wachovia, at a minimum, could easily have approached a small set of additional likely bidders for Columbia that would have created a competitive bidding environment resulting in maximum current value for Columbia stockholders. Frankly, the disclosures in the Proxy Statement lead us to believe that the Board favored the SSPF/CET transaction and did not explore other bidders because of the value that Columbia's management will receive from an ongoing association with SSPF/CET after the Acquisition.
2. The five non-management Board members (the "Independent Committee") on September 8, 2006 instructed Columbia's "Senior Executive Officers" to help negotiate the merger agreement with SSPF/CET. We believe this was inappropriate given that Columbia's management was separately negotiating lucrative new economic arrangements with SSPF/CET concerning the terms of management's continued association with SSPF/CET after the Acquisition closes. Under these circumstances, it would have been customary and far more preferable for the Independent Committee to conduct sale negotiations without any influence from Columbia senior executives who are essentially part of the buyout group. At best, Columbia management's incentive to negotiate the highest possible price out of SSPF/CET was diluted by its future economic interests in SSPC/CET and "New Deal LLC" (an entity that gives Columbia management attractive upside to successful new investments made by SSPF/CET or Columbia after the closing of the Acquisition). At worst, Columbia management appears to have facilitated Columbia signing a merger agreement that undervalues Columbia to the benefit of SSPF/CET and management, itself.
3. The Independent Committee should have realized that management was not acting in a manner designed to maximize the value of Columbia for all stockholders. The best evidence of this is the fact that management waited until October 18, 2006 to inform the full Board that there were "recent unsolicited inquiries from Company B, Company C and Company D". As of October 18, 2006, the inquiry from Company B was not "recent" - it was seventy-seven days old! A serious inquiry from Company D, a company interested in buying all of Columbia, appears to have been kept from the full Board for six days despite the fact that negotiations with SSPF/CET by mid-October 2006 were at an advanced stage. It should have been obvious to the Independent Committee from such inquiries that these contacts were a sign that there was more upside than downside in pursuing an auction of the Company and that there were likely many potential serious
   bidders for Columbia.
4. The Board made a mistake in accepting at face value that $19.00 was SSPF/CET's highest bid price. This price was first offered by SSPF/CET on June 26, 2006. From June 26, 2006 until November 3, 2006 (the last trading day prior to the signing of the merger agreement), the Bloomberg REIT index increased by 14.1% and the U.S. Government ten year bond yield fell by 52 basis points. These important fundamental data points suggest to us that SSPF/CET's valuation of Columbia should have increased over this time period and that the Board should have demanded a higher price. The Proxy Statement indicates that the Board was concerned that SSPF/CET's advisor, JPMorgan Asset Management ("JPMAM"), would react negatively to a demand for a higher price and perhaps would have terminated discussions. We find this to be implausible. It appears to us that the Independent Committee was blind to or ignored the increasing strength of Columbia's bargaining position.

Clearly, there are some major conflicts of interests in this transaction that should catch the attention of shareholders. But is this too little too late? Well, it is difficult to tell if 20% withholding is enough to stray a merger vote; however, this stock is definitely one worth watching closely in case other bids arise (despite the termination fee) or in the event that the two concerned shareholders take further action to protect shareholder interests.