Executive Payouts – An Increasingly Large Frictional Cost in Mergers

Mergers frequently result in large one-time payouts to executives of the acquired company, through change-in-control payments and acceleration of equity awards. Several recent mergers, however, have highlighted how significant those deferred costs can be for shareholders.

Executives at oilfield-services company BJ Services, which is being acquired Baker Hughes in a cash-and-stock deal worth $5.3 billion on the date of announcement, will receive payouts worth approximately 4.5% of the deal’s value – including change-in-control payments of $180 million, and accelerated vesting of equity grants worth another $55 million. The merger consideration carried a one-day premium of 16.7% – and over the one-year period preceding the announcement, a premium of 33.3% – making it unlikely shareholders will reject the transaction at the March 19 special meeting despite the relatively high payouts to executives. Longer-term shareholders, however, were not particularly well-served: the merger consideration represented discounts of 22.2% and 42.6%, respectively, over the three-year and five-year periods preceding the merger announcement.

For shareholders at Black & Decker, which is being acquired by Stanley Works in an all-stock transaction worth $3.6 billion at announcement, the merger consideration also represented a premium to the one-day (22.1%) and one-year (55.9%) share prices, but a discount over the preceding three-year (8.6%) and five-year (19.3%) periods. Shareholders will vote on the transaction March 12. Executives will nonetheless receive merger-related payouts representing 4.3% of the transaction value, including $92.3 million in change-in-control payments and $59.6 million in accelerated vesting of equity grants.

These estimated payouts, however, exclude any payments to Black & Decker CEO Nolan Archibald, who late in the negotiation process acceded to a request from his independent directors to forego both his change-in-control payment and acceleration of his equity award vesting. By that point in the process, Archibald had already negotiated a post-merger role as executive chairman of the combined company, with an annual compensation of approximately $10 million, and from which he cannot be removed without the approval of 80% of the remaining directors. Archibald also receives a sign-on grant of 1 million options, for which the company did not provide a valuation, which will vest on the third anniversary of the merger. On that date Archibald will also receive a special “cost synergies” bonus of up to $45 million – plus interest at 4.5% per year – tied to the annual ongoing value of cost savings the combined company has realized. Even before accounting for interest payments, the bonus represents between 7% and 13% of the targeted cost synergies.

For more information contact Allie Monaco at PROXY Governance Inc

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