By Braun Jones, Partner, WWC Capital Group, LLC
Many people think that when a company is sold, the CEO and other executives walk away with a big, fat payday or golden parachute. So much money, in fact, that the executives could retire or at least live very comfortably without working for several years.
Those of us involved in the deal process know that this is not always the case. In fact, it happens much less frequently than one would think.
Last week, I was intrigued by a blog post by The Wall Street Journal. According to the post, most CEOs who sell their companies come out of the deal at a loss.
Even when shareholders receive a substantial premium, few CEOs (less than 15% in fact) would do better selling their companies at a 25% premium than they do with their existing pay packages. This is based on analysis of compensation packages (including equity, value of expected future pay and pension) for CEOs of companies in the Standard & Poor’s 1500 index by compensation consulting firm Shareholder Value Advisors.
The post pointed out that the loss of expected future pay for CEOs and the option time value would more than erase any gains on equity and on the spread between the option exercise price and the buyout price. These findings also support the notion that executive pay is excessive and out of control – a hot topic over the last few years.
Even if executive pay is too high, the following data are somewhat surprising. Only 15% of CEOs would be wealthier if they accepted a 25% premium offer and left the company, according to the analysis. Even more surprising is that the data also showed that most CEOs, nearly 80%, would be significantly worse off if their companies were acquired at a 25% premium. However, in almost all cases, shareholders would still likely be better off. This provides even further evidence that excessive executive pay may lead CEOs to make decisions to benefit their own interests, rather than those of the shareholders.
This brings me back to my point of the golden parachute. Do they still exist for CEOs who sell their company? I have seen less of this than in previous years, although sweeteners are often baked into a deal if the CEO is seen as a key executive that the buyer wants to retain. It seems to me, based on this data, that selling a company no longer creates a tycoon unless the CEO already owns substantial shares themselves. It’s no wonder CEOs often hold out for better deals.
Few CEOs are going to accept deals that leave them poorer than they would be to go to work every day, unless of course they have the shareholders interests in mind first.
Have you seen any acquisitions lately where the CEO is not retained, has done worse my accepting a deal, but did it for the benefit of the shareholders?