Bosses sell their cos, get millions & keep jobs too

NEW JERSEY: For sinful corporate behaviour, it is hard to beat the multiple millions bosses heap on themselves when they sell their companies. In theory, so-called change-of-control provisions drawn up by friendly lawyers make sure that CEOs and their lieutenants won’t hesitate to negotiate themselves out of their jobs by getting a fair price for the shareholders. If they do get fired after the takeover, they get huge financial benefits. In reality, they are getting extra millions merely for doing their jobs.

This year’s rash of leveraged buyouts — $644 billion globally so far, or about one-fifth of all takeovers — has taken this questionable practice to the level of farce. In many buyouts, accomplished largely with borrowed money, CEOs sell their companies to private investors, guzzle their change-of-control packages and keep right on running the show.

When Kinder Morgan CEO Richard Kinder announced last spring that he and others were buying the Houston-based natural gas pipeline company, he said, “If this merger is consummated, the management structure will stay the same.” What happens in these deals is that unexercised stock options and such things as restricted stock vest immediately and are valued at the above-market prices LBOs offer.

Shareholders of HCA, the biggest US hospital chain, for example, got a premium of 18% when they sold their shares to a buyout group that included HCA co-founder Thomas Frist Jr. When that deal, valued at $33 billion, was completed November 20, HCA chief Jack Bovender claimed a maximum of $46 million in benefits that supposedly were designed to ease the pain if he got the hook — which, of course he didn’t.

Mr Bovender converted $20 million of his total HCA holdings into a 0.5% stake in the new private company. Richard Bracken, president of the Nashville, Tennessee-based company, got $20 million in change-in-control benefits and bought 0.2% of the new company.

HCA’s Mr Frist, 68, did well too. The company’s former CEO converted his and his family’s 8.9% stake in HCA’s earnings and book value to a 30% stake on the same basis in the new company.

Mr Frist, whose brother Bill is retiring as a US senator, exchanged almost all the stock he controlled into $800 million in equity in the new company and other members of the buyout group assigned $180 million of their equity to the Frist interests. Mr Frist tendered his remaining HCA shares at the buyout price of $51 a share, taking in $24 million.

Freescale Semiconductor CEO Michel Mayer received $48 million in change-of-control benefits when he completed the sale of the Austin, Texas-based company to buyers led by Blackstone Group. Mr Mayer and other stockholders of the company that makes chips for mobile phones, cars and consumer-electronics products got a 30% premium for their shares.

Like HCA’s Mr Frist, Mr Kinder is exchanging his stake in the publicly held company for a larger one in the new private company. He now owns 18% of his company’s stock. He will exchange all his equity interests into a 31% stake in the new private company. The deal is expected to be completed in early 2007.

There’s been no full public disclosure yet of any change-of-control benefits accruing from the biggest-ever LBO announced November 20 — Equity Office Properties Trust by Blackstone Group for $36 billion. It may make for good reading too.