The Urge to Merge
Monty Hall would love the corporate version of “Let’s Make a Deal.” The rules are complicated, but the bottom line is simple. The easiest way for some executives to fatten their bank accounts is by agreeing to sell their companies.
The key phrase in this game is “change of control,” meaning a merger or an acquisition that puts an executive’s employment at risk. Change of control, for most employees, means sleepless nights spent wondering whether their jobs will be cut. Sleep comes easier for executives with retention bonuses and severance packages that kick in when a change of control occurs, but the practice should give shareholders nightmares. These jackpot-like rewards inevitably raise suspicions that executives have too much reason to push for merger.
Consider Thousand Oaks-based WellPoint Health Networks Inc., which in November merged with Indianapolis-based Anthem Inc. to create the nation’s largest health insurer. About 300 WellPoint executives qualified for retention bonuses or severance packages. WellPoint’s latest estimate of their total cost is up to $250 million. Leonard D. Schaeffer, the company’s former chairman, was the biggest winner. WellPoint recently wrote two checks to Schaeffer that totaled $119 million. The company described $68.5 million of that windfall as deferred compensation due Schaeffer after 19 years on the job. But Schaeffer also collected slightly more than $50 million solely because of a change-in-control clause in his contract.
Schaeffer, of course, isn’t alone in this game. James Kilts, chief executive of Boston-based Gillette Co., stands to win a reported $100 million in change-of-control payments if his company completes a proposed merger with Procter & Gamble Co. That windfall would come on top of a raise (estimated at 66% by the Boston Globe) and a long list of perks that Kilts received during 2004.
Paying CEOs a huge windfall for a merger (again, as if they owned the corporation and were selling it themselves) is especially strange when you consider that CEOs are already richly compensated for fulfilling their fiduciary duty to shareholders, to act in their best interest. Sometimes, that duty entails wrenching decisions to sell a company. But why the need to bribe CEOs to do what they were paid to do all along?
