Friday, June 8, 2007

The Rationale for "Sweetened" Severance Packages at Dow Jones

Posted by Jeff Lipshaw

If you read both the New York Times and the Wall Street Journal on a regular basis, you know it's like Michigan-Ohio State, Yankees-Red Sox, or Coke-Pepsi.  It's particularly interesting when the two Sugar papers are reporting on each other's businesses.

Dow Jones, which owns the WSJ, obviously is in the midst of a "bear hug" from Rupert Murdoch's News Corporation.  The NYT reported this morning that Dow Jones had increased the number of managers covered by special severance contracts from 25 to 160 (and reported that in an SEC filing).  I have the WSJ here and took a quick look at the "Index to Businesses" and don't see a reference to Dow Jones.

Whether or not it is justified empirically, there is a benign rationale for a board's decision to "sweeten the pot" in the face of a potential take-over, particularly here where the sweetening appears to be breadth of coverage rather than a pure money grab.  You need to have been in a large business going through acquisition discussions to appreciate the level of distraction from the business itself.  The board's perception will be that without some kind of incentive to stay through (and beyond) the consummation of a deal, managers are inclined to look for security, and are ripe for the plucking by competitors.  The perception may or may not be justified, but it seems to me to be supportable under the business judgment rule.  If there were to be an exodus, it hurts the value of a business, either in the long run if the deal does not go through, or in the short run to the purchaser.

Case in point.  When I was with Great Lakes, we were recruiting an executive then with Honeywell.  At the time, Honeywell was still to be acquired by General Electric (recall that the deal fell through as a result of merger enforcement in the EU).  The executive's long term compensation, triggered either by longevity at Honeywell or by a deal with GE, made it impractical for him to consider leaving, and we didn't get him. 

I know, in the present political climate, it is easy to be cynical about executive compensation "'intended to enhance the company's ability to retain and attract management-level employees' and to help them focus on their jobs," but sometimes a cigar is just a cigar.

http://lawprofessors.typepad.com/legal_profession/2007/06/the_rationale_f.html

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