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CEOs land big bucks in buyouts
'Golden parachute' deals mean millions of dollars and pricey perks for executives who sell their companies. Here are some of the CEOs for whom riches await.
By Michael Brush
When the huge golden parachutes unfurled last week at North Fork Bancorporation, corporate pay watchdogs were aghast.
Capital One Financial (COF, news, msgs) announced that it was acquiring North Fork Bancorporation (NFB, news, msgs), a deal that would put an astonishing $185 million into the pockets of John Kanas, North Fork's chairman and CEO.
But shareholders and compensation critics had better get used to such numbers, because Kanas isn't the last CEO in line for such a huge payday. (Nor is this new: Gillette CEO James Kilts collected $185 million when Procter & Gamble (PG, news, msgs) acquired his company last year.)
Want to know who may be next? It's not just an exercise in paycheck envy. Remember, when a CEO is sitting on such a huge potential windfall, it may provide that extra bit of motivation to find a buyer. And such deals, typically, mean good things for the share price of the company being bought.
Below is a look at some of the biggest CEO paydays in waiting. To find these, I checked the corporate filings of companies where shareholders are challenging golden parachutes, and of companies that already pay big money to their CEOs.
A cool $161 million
UnitedHealth Group (UNH, news, msgs) Chief Executive William McGuire's golden parachute rivals the best of them.
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For starters, McGuire gets three times his salary and bonus if UnitedHealth is acquired. Thats $23 million based on his 2004 pay, the most recent salary data available.
Heres where the big money kicks in: All of McGuires options would vest immediately, a feature common in golden parachutes. McGuire had $138.5 million worth of options that were not yet ripe for exercising, or 3.2 million options, at the end of 2004. McGuire has been getting 1.3 million options a year.
The total, so far, in this golden parachute: $161 million.
Thats worse than a bandit who holds up a 7-Eleven, and he doesnt even run the risk of getting shot, says Don Hodges, president and co-manager of the Hodges Fund (HDPMX), who follows executive pay issues.
McGuire also would get three years worth of credit toward his executive pension plan -- a plan slated to pay out $5 million a year at the end of 2004. Besides all the money, shareholders would foot the bill for McGuires use of the corporate jet for three years. Theyd also fund an office and secretary for McGuire, and life and disability insurance for three years.
This one stands out because, in addition to the huge numbers, youve got all those perks added on, says Eleanor Bloxham of the Value Alliance and Corporate Governance Alliance a Westerville, Ohio,-based company that advises boards and companies on corporate governance issues. "Thats over the top."
McGuire already has what most people would consider a generous pay package. UnitedHealth has paid him $8 million a year for the past several years, and he had exercisable options worth more than $1 billion at the end of 2004. Since then, the stock has risen considerably, so those options are worth even more.
And there's more. Like many executives, McGuire would be reimbursed for any excise taxes on the golden parachute goodies -- a perk known as the tax gross-up. Its hard to calculate how much this would be, but Kilts at Gillette received more than $10 million to cover taxes.
UnitedHealth spokesman Mark Lindsay responds that McGuire took the reins at the company in 1991, when it was in serious financial distress and its stock sold for less than $2. The stock now trades for $56.
A big part of McGuires pay is performance-based. So his compensation -- including the options in the severance package -- reflects that. That is the phenomenon you are observing. He has performed in an extraordinary way beyond all expectations, and his compensation is consistent with that performance, says Lindsay.
Of all the companies mentioned here, UnitedHealth Group is the least likely to get taken over, simply because it is so big. Its market cap is $76 billion, making it one of the 60 biggest publicly traded companies.
Incentive for CEOs
Companies often put change in control rewards in place so that if a company gets a good buyout offer, it wont be scuttled by a CEO blocking the deal to protect his paycheck, says Bloxham. Boards want to give CEOs an incentive not to hang on at any cost, she says.
That would explain a more moderate payout of $15 million to $20 million -- roughly two or three times a CEO's base salary, plus a reasonable bonus. But when accelerated options vesting, multiples of fat bonuses, tax gross-ups and other goodies inflate the parachutes, it raises two problems for shareholders.
First, the CEOs interests may no longer be aligned with those of the shareholders. CEOs might be interested in selling the company at any price because it is so (personally) beneficial, says Bloxham.
And it's a poor use of shareholder wealth. Investors would be better served if the money were reinvested in the company, says Paul Hodgson, author of "Building Value Through Compensation" and an analyst at the Corporate Library.
A good reason to plant a 'For Sale' sign
Given that home builders have been so profitable, its not surprising their CEOs are sitting on fat potential payouts.
Larry Mizel, chairman and CEO of M.D.C. Holdings (MDC, news, msgs), stands to collect more than $87 million if MDC is acquired. MDC Holdings is the ninth-largest publicly traded home builder by market cap, according to Thomson Financial. Mizels parachute is big because it would pay him three times his prior year's bonus. His 2005 bonus was $20.5 million, so that alone is worth $61.5 million. Next, he gets base salary for the prior three years, adding another $3 million to the package.
Any unvested options would become exercisable. At the end of 2005, he had 991,038 options that were not yet vested. They are worth about $23 million, with MDC shares trading at a recent price of $66. Mizel would also get a tax gross-up and continued medical benefits for himself and his family.
Mizel already has 606,287 exercisable options, which the company valued at $27.2 million at the end of 2005.
Finance chief Paris Reece, III, responded that MDC Holdings change-in-control provisions are similar to those at other home-building companies. He says that under Mizels leadership from 1996 to 2005, MDC Holdings net income grew approximately 2,400% and the stock rose 1,670%.
R. Chad Dreier, chairman and CEO of The Ryland Group (RYL, news, msgs), has built-in protection against a housing market slowdown. Dreier would get three times his highest career salary and bonus. That works out to $52.5 million, using his 2005 salary of $1 million and bonus of $16.5 million. Dreier would get accelerated vesting of a supplemental retirement plan slated to pay out $2.4 million a year. He would also get the tax gross-up, health insurance for himself and his wife for 15 years, and relocation and outplacement assistance.
At the end of 2005 he had 1,100,000 options, all exercisable, valued by the company at $73.2 million.
Rylands board says such perks help the company attract the best leadership talent available in the highly competitive homebuilding industry. It also says the parachute helps avoid distractions involving executive management that arise when the board is considering possible strategic transactions involving a change of control.
A Ryland spokeswoman says Dreiers bonus has grown in tandem with the companys performance, and this has increased the size of his golden parachute, too. Net earnings have climbed at a compound annual growth rate of more than 40%, from 2001 to 2005.
Creating, and taking, value
Allegheny Energy (AYE, news, msgs), a utility, has the makings of an acquisition target. Chairman and CEO Paul Evanson is close to retirement age and has no designated successor. He would also realize a rich reward of more than $31 million if the company is acquired. Evanson would get three times his salary and bonus, which comes to $7.2 million, plus five years worth of retirement benefits -- or $4 million. He would also get accelerated vesting of 900,000 options, worth $20.4 million.
Spokesman Fred Solomon responds that most of the severance Evanson would get comes in the form of stock that he received as an enticement to sign on in 2003, when the company was near bankruptcy. Since then the stock has quadrupled in price, adding billions of dollars in stockholder value, due in no small part to Mr. Evansons successful management of the corporation. While the value of that stock is substantial, its important to remember that it could have been worth nothing, Solomon says.
Thanks to vast energy holdings, XTO Energy (XTO, news, msgs) accounts for about 2% of the natural gas produced in the U.S. each day. But those same energy holdings make XTO an attractive target now that the price of natural gas is so high. In an acquisition, Bob Simpson, the company's founder, chairman and chief executive, would be rewarded handsomely.
He would get three times his annual compensation, which works out to $49 million using 2004 numbers. Simpson would also get the tax gross-up, and 18 months worth of health benefits. Simpson had 4 million options at the end of 2004 worth about $72.8 million.
XTO Energy says Simpson deserves a rich payout in any takeover because he founded a company in 1986 that is now worth more than $15 billion.
He created a lot of wealth, so he deserves it, says Gary Simpson, the head of investor relations and finance at XTO Energy. You cant look at it in a vacuum. The $11 billion that has been created for shareholders, thats the balance.
At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column.
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