Friday, December 10, 2004
Key Comp Feature to Get Where Applicable
'Parachutes' gain popularity
by Ron Orol Posted 04:58 EST, 10, Dec 2004 - Deal.com
When Axa SA bought MONY Group Inc. earlier this year for $1.5 billion, MONY CEO Michael Roth and other top executives at the company walked off with $82.6 million in severance payments. Shareholders, meanwhile, came away with a boatload of bitterness, contending that the deal undervalued their investment and unduly rewarded the insurer's senior managers.
The dispute is symptomatic of the growing prevalence of "golden parachutes" in dealmaking, in which corporate boards guarantee substantial financial awards to managers if their company is purchased.
Corporate governance activists and a widening chorus of investors complain that such incentives drive executives to engage in mergers that harm shareholders. And although the use of parachutes is not new, they say, the practice is on the rise.
"The amount that management walked away with was more than what all shareholders received together as a premium," said Michael Garland, coordinator of corporate transactions at the AFL-CIO, which was an investor in MONY. "The payouts are so large that it's hard to be rational about whether a merger is in the best interest of shareholders."
In another big payout this year, Bank of America Corp. president Eugene McQuade got a $25 million exit package after the Charlotte, N.C., financial giant merged with FleetBoston Financial Corp. WellPoint Health Networks Inc. executives also received close to $200 million in severance after the health insurance company was acquired by Indianapolis-based Anthem Inc.
Investor Responsibility Research Center Inc., a Washington-based consulting firm, reports that 73.4% of the 2,000 largest U.S. public corporations have some sort of parachute in place, compared with 53% in 1995. In dollar terms, too, merger-related severance packages have been getting bigger, IRRC spokeswoman Carol Bowie said.
Shareholders are fighting back by filing proposals to limit the size of payouts. In 2004 investors introduced measures to reduce executive severance at 26 companies, up from 18 in 2003. In both years a majority of shareholders supported the proposals.
"Shareholders' primary concern about parachutes is that they can reward poor performance leading up to a change of control," said Brandon Rees, a research analyst in the investment office at the AFL-CIO.
Although such governance restrictions are nonbinding, many companies are adopting restraints on the size of parachutes. In October, for example, Massey Energy Co., a Richmond, Va., mining company agreed to curb severance awards after 70% of participating shareholders voted to approve a parachute measure. In April, American Electric Power Co., a Columbus, Ohio, utility, took a step toward implementing such a measure after 58% of participating shareholders approved it.
Leading the drive to rein in parachutes are union pension funds, which have filed severance proposals at 20 companies in time for their 2005 annual meeting. But individual investors also are pressing for stricter controls. So-called "activist investors" John Chevedden and William Steiner introduced a parachute proposal at Honeywell International Inc. in April that received backing from 52% of participating shareholders. In this case, however, the Morristown, N.J., aerospace giant declined to adopt limits.
MONY executives originally were to receive total severance payments of $90 million, but after shareholder pressure and related litigation, management agreed to cut the payout by $7.4 million. Paris-based Axa later sweetened the deal by promising an additional 10-cent dividend to shareholders. That payment is on top of a previously announced 23-cent to 25-cent dividend.
Axa spokeswoman Mary Taylor said the premium MONY shareholders received varied significantly depending on when they bought stock. Shares bought 30 days before the companies unveiled the deal last fall would have received a 12% premium. But shareholders who purchased stock the day before the merger was announced earned only a 5.7% premium, or roughly $78 million.
by Ron Orol Posted 04:58 EST, 10, Dec 2004 - Deal.com
When Axa SA bought MONY Group Inc. earlier this year for $1.5 billion, MONY CEO Michael Roth and other top executives at the company walked off with $82.6 million in severance payments. Shareholders, meanwhile, came away with a boatload of bitterness, contending that the deal undervalued their investment and unduly rewarded the insurer's senior managers.
The dispute is symptomatic of the growing prevalence of "golden parachutes" in dealmaking, in which corporate boards guarantee substantial financial awards to managers if their company is purchased.
Corporate governance activists and a widening chorus of investors complain that such incentives drive executives to engage in mergers that harm shareholders. And although the use of parachutes is not new, they say, the practice is on the rise.
"The amount that management walked away with was more than what all shareholders received together as a premium," said Michael Garland, coordinator of corporate transactions at the AFL-CIO, which was an investor in MONY. "The payouts are so large that it's hard to be rational about whether a merger is in the best interest of shareholders."
In another big payout this year, Bank of America Corp. president Eugene McQuade got a $25 million exit package after the Charlotte, N.C., financial giant merged with FleetBoston Financial Corp. WellPoint Health Networks Inc. executives also received close to $200 million in severance after the health insurance company was acquired by Indianapolis-based Anthem Inc.
Investor Responsibility Research Center Inc., a Washington-based consulting firm, reports that 73.4% of the 2,000 largest U.S. public corporations have some sort of parachute in place, compared with 53% in 1995. In dollar terms, too, merger-related severance packages have been getting bigger, IRRC spokeswoman Carol Bowie said.
Shareholders are fighting back by filing proposals to limit the size of payouts. In 2004 investors introduced measures to reduce executive severance at 26 companies, up from 18 in 2003. In both years a majority of shareholders supported the proposals.
"Shareholders' primary concern about parachutes is that they can reward poor performance leading up to a change of control," said Brandon Rees, a research analyst in the investment office at the AFL-CIO.
Although such governance restrictions are nonbinding, many companies are adopting restraints on the size of parachutes. In October, for example, Massey Energy Co., a Richmond, Va., mining company agreed to curb severance awards after 70% of participating shareholders voted to approve a parachute measure. In April, American Electric Power Co., a Columbus, Ohio, utility, took a step toward implementing such a measure after 58% of participating shareholders approved it.
Leading the drive to rein in parachutes are union pension funds, which have filed severance proposals at 20 companies in time for their 2005 annual meeting. But individual investors also are pressing for stricter controls. So-called "activist investors" John Chevedden and William Steiner introduced a parachute proposal at Honeywell International Inc. in April that received backing from 52% of participating shareholders. In this case, however, the Morristown, N.J., aerospace giant declined to adopt limits.
MONY executives originally were to receive total severance payments of $90 million, but after shareholder pressure and related litigation, management agreed to cut the payout by $7.4 million. Paris-based Axa later sweetened the deal by promising an additional 10-cent dividend to shareholders. That payment is on top of a previously announced 23-cent to 25-cent dividend.
Axa spokeswoman Mary Taylor said the premium MONY shareholders received varied significantly depending on when they bought stock. Shares bought 30 days before the companies unveiled the deal last fall would have received a 12% premium. But shareholders who purchased stock the day before the merger was announced earned only a 5.7% premium, or roughly $78 million.
# posted by Tom @ 3:43 PM 
