Der Sanierungsexperte Bob Rajan (39) wird neuer Managing Director bei der internationalen  Managementberatung Alvarez & Marsal (A&M) in München. Damit baut A&M sein kontinuierlich wachsendes Deutschlandgeschäft weiter aus. Mit der aktuellen Verpflichtung von Bob Rajan konnte A&M die Top-Managementebene weiter verstärken.
Bob Rajan verfügt über eine 15-jährige internationale Restrukturierungserfahrung in ganzheitlichen Sanierungskonzepten und Wertsteigerungsprogrammen für Unternehmen. Gleiches gilt für die Realisierung von Unternehmenstransaktionen in Sondersituationen. Sein profundes Know-how stellte Bob Rajan als CFO und CRO in namhaften Restrukturierungsprojekten in Deutschland, England, Irland sowie in Nord- und Südamerika unter Beweis.
Bob Rajan, der als kanadischer Staatsbürger seit gut fünf Jahren in  München beheimatet ist, war früher schon einmal bei Alvarez & Marsal beschäftigt, für insgesamt fünf Jahre. Außerdem war er in Führungspositionen bei PricewaterhouseCoopers und zuletzt bei AlixPartners tätig.
Thomas A. Kolaja, Deutschlandchef von A&M begrüßt Rajans „ausgeprägte Kombination aus finanzieller und operativer Expertise“, die Alvarez & Marsal im deutschen Markt noch weiter voranbringen werde. „Wir freuen uns, einen Professional dieses Kalibers wieder an Bord zu wissen“, so Kolaja. „Seine Erfolgsbilanz im internationalen Beratungsmarkt spricht für sich.“        
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Über Alvarez & Marsal (A&M)
Seit Gründung im Jahre 1983 zählt A&M zu den führenden Anbietern von Programmen zur ganzheitlichen Restrukturierung in Unternehmen, von Sanierungsberatung, Interims-Management, Transaktionsberatung sowie zur Bekämpfung von Wirtschaftskriminalität. Weltweit sind 2.200 Mitarbeiter an 44 Standorten in Nordamerika, Europa, Mittel- und Nahost und Lateinamerika tätig. International bekannt wurde A&M durch die Beauftragung zur Gesamtabwicklung des ehemaligen Investmenthauses Lehman Brothers, der Restrukturierung der National Bank in Griechenland und unlängst durch die Finanzmarktreformen für die Regierungen in Spanien, Irland und Zypern. Restrukturierungs- und Wertsteigerungsprogramme konnten in Deutschland bei namhaften Unternehmen, u.a. im Anlagen- und Maschinenbau, in der Automobil-Zulieferindustrie und im Bereich Handel erfolgreich Realisierung finden. Aufgrund der extrem umsetzungsorientierten Berater ist A&M kurzfristig in der Lage, Unternehmen eine maßgeschneiderte Unterstützung mit direkt messbaren Lösungen anzubieten.
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As shareholders and advisory groups continue to put pressure on executive compensation, the number of executives entitled to excise tax gross-ups and other benefits in the event of a change in control is declining, according to a new Alvarez & Marsal Taxand study.  The report, which is available for download at http://www.alvarezandmarsal.com/executive-change-control-report-20132014, examined arrangements among the top 200 publicly traded companies in the U.S. 
While the average value of change in control benefits for CEOs remained relatively flat from roughly $30.2 million in 2011 to $29.9 million in 2013, the study revealed notable changes in equity plans, cash severance multiples and excise tax gross-up payments – signalling a downshift in payouts and an evolving mindset among boards and compensation committees.
“Regulatory changes and the influence of shareholders and advisory groups have dramatically increased transparency, while decreasing value of change in control severance and excise tax gross-ups,” said Brian Cumberland, Managing Director with Alvarez & Marsal Taxand and head of its Compensation and Benefits practice.  “As companies increasingly recognize they are going to have to stand behind their numbers, boards and compensation committees are taking a hard look at the executive benefits they provide to avoid any perception of excess or the diminishing of shareholder value.” 
A major trend impacting change in control arrangements is the move toward “at will” employment for executives and the decline of employment agreements.  The study showed that 22 percent of CEOs are not entitled to severance payments under any circumstances and 44 percent are not entitled to severance upon a termination not in connection with a change in control – both of which are surprisingly high percentages.
Another notable finding: the number of executives entitled to excise tax gross-ups (payments provided by a company to make an executive “whole” by covering tax liability related to change in control payments) continues to drop.  Among CEOs, entitlements to gross-ups or modified gross-ups declined significantly from 61 percent in 2009 to 30 percent in 2013.  Furthermore, 60 percent of companies that currently provide an excise tax gross-up or modified gross-up indicated they intend to phase out or completely eliminate excise tax gross-ups in the future.
The study also revealed a significant shift in the vesting of equity upon a change in control, from vesting upon a “single trigger,” which only requires a change in control, to a “double trigger,” which requires a change in control and termination of employment.  Most equity arrangements – 85 percent of the companies reviewed in 2013 – vest upon a “single trigger.”  However, many more companies are moving to a “double trigger,” with 63 percent of companies in 2013 having at least one equity plan that provides for “double trigger” vesting, compared to 28 percent of companies studied in 2009.  This can, in part, be explained by the fact that equity plans are typically put into place for 10 years; any new plans being created are generally “double trigger.” 
Other notable findings include:
·         Decrease in severance multiples.  The most common cash severance multiple for CEOs is between two and three times compensation (43 percent). The prevalence of a three times multiple has fallen to 42 percent in 2013 from 51 percent in 2011.
·         Fewer enhancements in retirement benefits. The percentage of companies that provide at least one executive with an enhancement in retirement benefits decreased to 46 percent in 2013 compared to 52 percent in 2011.
·         Long-term incentive payments. The benefit with the largest increase in value was long-term incentive payments which, for CEOs, went from $18 million in 2011 to $20 million in 2013.  This is largely driven by fluctuations in the stock market.
·         Industries with the largest and lowest benefits. The consumer discretionary industry has the largest average benefit of $43.9 million for CEOs, while the telecommunications industry offers the lowest average benefit of $17.5 million for CEOs.
The study, which was conducted to understand current pay practices and to analyze their transparency, examined the 200 largest public companies in 10 different industries based on market capitalization. The study was also performed in 2006, 2007, 2009 and 2011.
About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, LLC, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M’s commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.
Alvarez & Marsal Taxand is a founder of Taxand, the world’s largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.
About Alvarez & Marsal
Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to activate change.
Privately-held since 1983, A&M is a leading global professional services firm that delivers performance improvement, turnaround management and business advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action.  Our senior professionals are experienced operators, world-class consultants and industry veterans who draw upon the firm's restructuring heritage to help leaders turn change into a strategic business asset, manage risk and unlock value at every stage.
When action matters, find us at alvarezandmarsal.com
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All-inclusive holidays are one of tourism's biggest growth areas. Properties that include in one price a vacationer's room, board, alcohol and activities typically have greater profitability levels due to their higher occupancy levels, writes Hector A. Medina in Global Hotel Network’s GHN Perspectives.
Since its inception in the 1950s by Club Med and then in Jamaica the 1970s with SuperClubs, the all-inclusive concept has become its own industry within the tourism sector. In some mass-market destinations in the Americas, namely Cancun, Mexican Riviera Maya, Dominican Republic and Jamaica, it is the dominant offering.
Medina writes that all-inclusive operators were once associated with crawling buffet lines, subpar food and cheap liquor. Now many have made an effort to adopt the cruise line industry’s operating business model that provides guests with more “bang for their buck.” Such an approach also provides the owner/operator a chance to upsell guests on other services, and that translates into profitability.
Even so, many U.S. hotel brands are watching from the sidelines. For one reason: they have moved from a real estate-based business models to a fee-based or “asset light” growth model. All-inclusive companies have had a difficult time replicating this model, according to Medina.
Read more in “Will Other U.S. Brands Jump on the ‘All-Inclusive Bandwagon?’”

A number of accounting scandals involving India-based private equity portfolio companies have contributed to the erosion of investor confidence in the country. In the March 2014 issue of Asian Venture Capital Journal (AVCJ), Vikram Utamsingh, Managing Director and Co-Head of A&M India, explains how a more comprehensive approach to due diligence can help tighten the process.
From "India Due Diligence: Smoke and Mirrors"
Alvarez & Marsal (A&M) has recently expanded its India presence, adding a new transaction advisory group that offers financial accounting, tax and operational due diligence services in addition to setting up a dedicated commercial due diligence practice.
Vikram Utamsingh, who was recently appointed A&M's joint country head, notes that it is often the operational element of due diligence work, in particular, that is missing; this includes assessing if there are operational issues in a business that could cause problems when a private equity firm comes in to help it scale up.
"It is important to ask if the operational issue is a one-time problem or is it a fundamental problem that can hurt the future profitability of the business," says Utamsingh. "This is the piece that has been missing and I think that if PE firms would add that piece, they would have a much more informed and holistic view of the business they are investing in."
A&M's Utamsingh notes that the evolution of industry in India will be dependent on promoters opening up to GPs as partners and appreciating what they bring to the table. "The PE firms are forcing the change," he says. "They realize that success in investing in the country by relying on management to execute the business plan and just playing the role of investor is not enough."
 
This content originally appeared in the cover story of the March 2014 issue of Asian Venture Capital Journal. Re-published with permission.

It is typical for lawyers and consultants practicing in the United States to view the world through the prism of their experiences in the United States. There is a tendency to see evolution of the law in other countries in terms of how it matches up with what is happening in the U.S. For example, in the antitrust arena, not that many years ago when people talked about harmonization of antitrust laws and enforcement regimes between the U.S. and Europe, they spoke in terms of how long it would take for Europe to adopt the U.S. model. We know now, of course, that harmonization means something very different and, perhaps, the real question is how rapidly the U.S. enforcement model will move toward Europe’s.

With that experience in mind, it is interesting to cast an eye beyond Europe to Asia, where new competition regimes are emerging and existing enforcement structures are finding new teeth—and new targets. If there is a lesson to be learned from the U.S. experience with antitrust colleagues at the European Commission (EC) in Brussels and Europe, it is that the Asian competition models will neither be clones of the U.S. nor European models. In fact, the emerging competition policy regimes we see in Asia reflect law, culture and values unique to each jurisdiction. For that reason, it is useful to review some of the major antitrust initiatives taking place in Asia, to try to understand what they mean for companies in the rest of the world that are active in Asian markets.

Antitrust enforcement in Asia is, of course, not new. There have been enforcement regimes in Japan, South Korea and other nations for many years. For a long time they were seen as relatively weak, focused on institutionalizing protectionist behavior and of little real consequence to Western-based businesses. That is surely no longer the case. Where previously a merger between U.S.-based firms might have implicated only U.S. and European antitrust laws, such a transaction will be analyzed in jurisdictions around the world, especially in places like the People’s Republic of China (China or PRC), Australia and India. Cartel activity that would have been challenged aggressively in the U.S. and Europe is now challenged aggressively and cooperatively by antitrust enforcers in the U.S., Europe and throughout Asia.

As a result, it is critical to understand, at a high level at least, what the laws and enforcement mechanisms pose and how they are developing. While a complete review of Asian competition policy enforcement is a worthwhile subject, in this discussion I focus on four jurisdictions: Australia (which has an active, aggressive and mature antitrust enforcement agency), South Korea (which has had an active enforcement regime for many years), China (which adopted and began enforcing antitrust laws only in the last five years, and Hong Kong (which has a new competition ordinance and where enforcement is likely to begin next year).

Australia

In Australia, antitrust enforcement is the province of the Australian Competition and Consumer Commission (ACCC). The ACCC has been, arguably, the most active enforcement agency in the Asia-Pacific region for many years. It has been vigorous in investigating mergers that implicate competition in Australia, and it continues to be aggressive in challenging mergers that it views as anticompetitive.

The ACCC has also taken on a leading role in cross-border cartel investigations and has established itself as an equal enforcement partner to the U.S. and EC. A prime example of this is the role taken by the ACCC in connection with the recent air cargo cartel investigation. In that case the ACCC, in conjunction with antitrust enforcers around the world, vigorously investigated and prosecuted the cartel participants. The ACCC has been similarly vigorous in pursuing investigations into the alleged abuse of market power and in the consumer protection area.
 

While it would be easy to surmise that emerging regimes in the region will be modeled on either the U.S. enforcement model or that of the European Commission, it is plausible, if not likely, that some countries will follow the lead of Australia. The ACCC has established a reputation as a careful and thorough enforcer, relying on sophisticated legal and economic analysis. Aside from casting a wide net with its own enforcement activities, the ACCC offers a credible enforcement model for other enforcement regimes.

South Korea

In South Korea, enforcement is active. While an ongoing focus for the Korean Fair Trade Commission (KFTC) has been cartel investigations, recent amendments to the competition policy laws suggest a likely increase in criminal complaints. The KFTC is a vocal presence in Korea. Its leadership is active in promoting its role in fostering fair competition and in pushing for legislative amendments to the current competition laws.[1] Indeed, there have been several amendments passed in the last year to the Fair Trade Laws, most of which will become effective this year.

Of particular interest now is the extent of the KFTC’s recent activity in analyzing so-called fair, reasonable and non-discriminatory (FRAND) licensing requirements that are imposed on firms with so-called standard-essential patents (SEPs). In a recent decision, the KFTC determined that Samsung did not violate its FRAND obligations on claimed SEPs, a decision that was at odds with those in other jurisdictions. [2] With ongoing disputes in the mobile device sector involving alleged patent infringement and abuse of the standard setting process, it is likely that investigations and decisions by enforcers such as the KFTC will garner increasing attention.

People’s Republic of China

The anti-monopoly law (AML) that governs competition policy enforcement in the PRC went into effect in 2008. While not as old or established as some Asian antitrust enforcement regimes, the AML is a key statute, and China’s growing importance as a commercial and industrial power mandates an understanding of and compliance with the Chinese law. Enforcement authority in China is vested in three agencies: The Ministry of Commerce (MOFCOM) is responsible for merger review, the National Development and Reform Commission (NDRC) investigates allegations related to pricing, and the State Administration for Industry and Commerce (SAIC) handles non-price matters.

Of these agencies, MOFCOM is best known and its enforcement activities have been most visible. Since 2008, the number of transactions notified to MOFCOM has increased more than twelvefold and, more important, the number of instances in which MOFCOM has adopted positions at odds with its enforcement brethren has increased markedly. Indeed, it is striking that MOFCOM has shown a distinct willingness to demand remedies from merging parties in cases that have been cleared elsewhere or to insist on changes beyond what other enforcement agencies have demanded. This trend is likely to continue. If it is true that global antitrust standards are driven by the most active antitrust enforcement regimes, it seems likely that MOFCOM will be an increasingly important driver in setting global antitrust standards.

In a recent decision, MOFCOM cleared—with conditions—the proposed acquisition by Fisher Thermo Scientific of Life Technologies. What is especially interesting is that the MOFCOM-imposed conditions for clearance were importantly different from those in the EU (which also provided conditional compliance). This is noteworthy because, first, it indicates the willingness of MOFCOM to carve its own path in demanding remedies that respond to conditions in the PRC and, second, it highlights the role that China can play in imposing remedies for non-Chinese firms with notification obligations in China that go beyond what are imposed in jurisdictions such as the EU and the United States. In planning for possible enforcement consequences in different jurisdictions, merging parties ignore China at their peril.

Notwithstanding their less visible public role in antitrust enforcement than that of MOFCOM, the NDRC and SAIC are significant enforcement agencies in their own right.[3] While the seemingly artificial line-drawing that resulted in each agency’s unique focus raises some interesting jurisdictional questions (e.g., who investigates allegations of non-price and price-related behavior?), the key take-aways from an analysis of the two agencies’ recent activities are that: (1) their investigations, especially on the cartel front, are well coordinated with other enforcement jurisdictions; (2) the scope of their investigative activities is expanding; and (3) these agencies have matured such that they are increasingly comfortable in blazing their own path, in terms of the breadth of issues they investigate and the scope of remedies they impose.

Hong Kong

The antitrust newcomer in Asia is Hong Kong. A new competition ordinance was passed in June 2012 and, while the enforcement guidelines have not yet been circulated for comment, there is a general expectation that the enforcement regime will be meaningful and that Hong Kong will emerge as a significant and substantive player in antitrust enforcement in Asia and the rest of the world.

The Ordinance contains prohibitions on restrictive arrangements and concerted behavior (e.g., cartels and, presumably, arrangements that allocate markets or otherwise limit the scope of horizontal competition). It also bars any abuse of substantial market power (with the operational definitions still to come) and bans mergers that are anticompetitive in the telecommunications sector. The anti-merger provisions do not extend beyond telecom; however, it is easy to imagine that these restraints will ultimately be extended to other sectors.

As of now, it is difficult to predict with certainty how enforcement in Hong Kong will manifest itself. Until the enforcement guidelines are drafted and presented, any predictions about enforcement standards, the transparency of the enforcement process, and the initial aggressiveness of the enforcers are merely educated guesses. However, two conclusions seem warranted. First, this is likely to be a substantive antitrust enforcement regime that will require substantial legal and economic work. Second, its importance will likely grow over time as enforcement officials move up their learning curve and as enforcement standards and legal precedents are better established.

---------

Antitrust enforcement standards are set by the most active enforcers. The center of enforcement—which at one time was clearly the United States—has shifted more and more to Brussels as the EC has flexed its enforcement muscles. It is surely fair to say that there are two reference points now. But, a third focal point is likely to emerge in Asia. There is no reason to believe that European antitrust enforcement will slacken, and whereas enforcement activity in the U.S. does wax and wane, increasingly vigorous enforcement in Asia is a certainty. Any business whose activities touch on Asian commercial centers needs to pay attention to Asia’s emerging regimes. Managing the demands of diverse laws will be a challenge, and the costs of ignoring them will be high. Attention to the legal requirements imposed by these statutes and an understanding of the legal and economic analyses that will be required to defend behaviors in these countries is—and will remain—essential.

Read more

By Arthur Forbus and Tammy Norton
Over the past two decades we have learned a lot of lessons around what works and what doesn’t when it comes to implementing Oracle Hyperion Enterprise Performance Management (EPM). No two implementations are ever the same, which is why we love the challenge. However, there are some best practices for enabling Hyperion EPM technology into business processes that will allow you to enjoy success both during and after implementation.
Of utmost importance is determining where you are going. Start with defining an overall vision for performance management. This should include strategic modeling and planning, budgeting and forecasting, and reporting and analytics; it should not just be a plan for replacing your Microsoft Excel spreadsheets for the close and consolidation process with Oracle Hyperion Financial Management (HFM), for example. While the automation aspects of HFM will bring relief to your hours of data manipulation in Excel, you don’t want to have to re-implement when the business changes suddenly or financial planning and analysis (FP&A) decides it needs to get out of Excel as well. Create the roadmap and then redesign your close and consolidation process with an integrated vision for performance management.
Second, you must get everyone involved. This means engaging with business users, accounting, FP&A, the business units, and all of the key stakeholders, not only at corporate, but also in the field. Do not allow your project to turn into a “turnkey” consulting project in which you describe your requirements and then months later the consulting team hands you a manual and says, “Call us if you need us.” Likewise, do not let the project become an IT-only project. They may get the software installed and turned on, but you may spend years tweaking it to your real requirements. The business users must be involved with the Hyperion EPM implementation from the beginning, and that includes helping to establish the vision and roadmap, defining requirements, designing and building the technology, and finally testing and deploying it. Then guess what? It is back to the roadmap.
Now you are ready to leverage a third best practice for Hyperion EPM implementations: defining your requirements. A great place to start investigating requirements is by documenting your existing processes using Value Stream Mapping (VSM). The traditional, detailed Visio process flows usually get thrown away almost as soon as you create them. The key with VSM is to document key processes, looking for waste and variation. Once you understand the current processes, you can start thinking about the future state processes, again using VSMs. Use your own company, benchmarking business units with each other and looking for the best practices to include in the future state processes. Also, consider looking outside your company to others in your industry with similar size and complexity, as well as Hyperion user groups. Both are great avenues for exploring things others are doing that may be adaptable to your business processes.
In addition to the VSMs, developing a functional requirements document for your Hyperion EPM implementation should include the system technical design, implementation cost, training cost and rollout strategy. Design architects should perform the functional and technical design of the new system and produce the design document, which will include the detailed models of the system, such as the application and infrastructure components, metadata descriptions, dimensionality, data flows and the details of each component of the software. The functional requirements document is critical to outlining what’s required in a new system. The document should provide additional detail to the overall functional scope of the project and should also lay out the goals of the project, key stakeholders, project assumptions and project in/out of scope items. Other important items to define are focused on key features of the software related to the functional and data components. Non-functional focus is on the usability requirements, performance and operational requirements, and user documentation. And finally, the document should explore security requirements and future maintenance best practices.
After the requirements are complete, the team should create a project plan that lays out key dates, dependencies and tasks. Once the functional requirements, design document and project plan have been signed off by the steering committee, the exciting journey to implement the technology can begin. In the end, the amount of effort and time you put in before you actually start touching the software will determine the success of your Hyperion EPM project and will provide an excellent example to your stakeholders of what you are proposing and what they can expect as a result.
At an international offshore drilling contractor’s recent Oracle Hyperion EPM Suite implementation, each of these best practices was employed. The company established a vision, which included guiding principles of:
- Single, controlled source for all financial data.
- Consistent data model for both actuals and planning information.
- Collaborative project built by both corporate and divisional stakeholders.
- Reduced data manipulation, increased time for analysis.
- Improved reporting detail.
These guiding principles were established to address specific requirements and resulted in a roadmap for the parallel and global implementation of Hyperion Financial Management, Financial Data Quality Management, Planning, Essbase Analytics Link and Financial Reporting. The result was a journey from silos and manual processes to an integrated technology with appropriate automation. Their need for integrated performance management and the road they traveled to achieve success while readying the organization to continue its dynamic nature in the global offshore drilling industry was a result of following best practices before the technology was even employed.
Following these best practices will go a long way toward a successful Hyperion EPM implementation that is both on time and on budget, with the final product being one that will be accepted by the stakeholders as well as sustainable and adaptable as your company grows.
 
Arthur Forbus is a Managing Director with Alvarez & Marsal, where he specializes in integrated performance management (IPM). Managing Director Tammy Norton focuses on the Oracle Hyperion Suite and enterprise performance management (EPM).
This article appeared in the spring 2014 issue of OAUG Insight magazine, the official publication of the Oracle Applications Users Group (OAUG), and is reprinted with permission.

Merger and acquisition cycles are fueled by many forces, not least among them being the strategies promoted by activist investors and investment banking advisors. Once in favor, conglomerates dotted the industrial landscape. However, within the past several years, the scale, adjacent market synergies and potential integration benefits of an aggregation strategy have been counter-balanced by arguments for better management focus and clearer market / equity analyst communications.
Today, a disaggregation strategy promises rewards. High-growth divisions should command higher valuation multiples once separated from their stable earnings low-growth spouses. The market cap of A+B will exceed the market cap of AB, the consolidated entity (e.g., Altria’s spin-off of Philip Morris International).
Spin-off candidates tend to be vertically integrated businesses that have operations all along the value chain. The energy sector, for example, has contributed a number of transactions in this regard, with 2010 and 2011 seeing the separation of exploration from production, and 2013 and 2014 seeing the separation of refining from distribution.
During 2013, at least a dozen spin-off transactions were completed. Prospects for 2014 suggest a continuation of this trend with at least another 25 transactions rumored or on track for completion.
A Common Approach
A common approach is a tax free spin-off in which the company to be spun-off (“spinco”) is isolated (as a stand-alone legal entity), optimally capitalized, and then distributed to the pre-spin company’s (“remainco”) shareholders. The distribution can be accomplished either through a pro rata distribution of spinco shares to remainco shareholders or by issuing an exchange offer to current shareholders. Such transactions can be viewed as a proactive market strategy (as in the case of an integrated energy company that recently sought to disconnect its refining operations, a segment arguably valued at 3.5 – 5.0 times EBITDA, from its retail / petroleum marketing assets, a segment arguably valued at 7.0 – 8.0 times EBITDA). Increasingly common is a spin-off transaction where shareholder activists are the catalyst (e.g., Hess’ announced spin-off of its retail / petroleum marketing assets and potentially other segments). While the strategy is, by now, fairly well tested, execution risk certainly remains and, as with interpersonal relationships, separation is often easier said than done.
While the expected market capitalization benefits of such transactions generate most of the commentary about these deals, relatively little press is devoted to the potential pitfalls. Extracting a business from a consolidated group, even one that has been functioning as separate reporting unit, can be a challenging exercise.
Operationally, many businesses have adopted back-office consolidation with functions such as treasury, purchasing, finance, IT, research and development and human resources (HR) provided by cost centers to all operating units. Boyd Mulkey, a managing director with Alvarez & Marsal’s (A&M) Performance Improvement practice, who has advised companies on operational issues as they have spun-off divisions, observes that:
“Many businesses have very limited experience with the process of unraveling the extensive bonds that exist between its operations and its various support functions. Transition services arrangements can help relieve some, but not all, of the tension placed on an organization by disaggregation. Ideally, a specific blueprint and work plan is created for disconnecting a division to be spun-off with specific management roles, action steps and key milestone dates identified. Outside advisors are typically engaged to assist with any gaps in leadership created by the separation and to bring to bear appropriate expertise in handling any unusual or specific concerns associated with a given spin-off transaction. Major support functions such as finance and accounting, IT, procurement and HR typically all have a lot of heavy lifting to do as part of the spin-off process. All of this separation planning activity is generally underway at the same time financing, tax, regulatory and leadership discussions are in process.”
The Pressure is On
Further compounding the operational implications of a spin-off transaction are the resource demands placed on the company’s board, executive leadership, management teams and employees. By way of example, Ernest Brod, a managing director with A&M’s Global Forensics and Disputes practice, who advises organizations subject to intense activist shareholder pressure, explains that:
“Organizations subject to shareholder activists must progressively – and often simultaneously – shore up corporate defenses, monitor activist shareholding, develop and execute strategy, respond to provocations and conduct extensive due diligence of dissident nominees. These efforts cause distraction (and, sometimes, division), consume resources and may result in overly hasty corporate actions which can expose both the company and the personnel (board members) to reputational, financial and legal risk.”
Indeed, the risks faced by the board are notable. The spin-off transaction will, presumably, forever separate remainco from spinco. Potential synergies remaining from the association of the two companies will now be foregone, and possible dis-synergies may result from the separation (e.g., a separation agreement with limitations on future M&A activity).
Typically, concurrent with the spin-off transaction, each of remainco and spinco will adjust their respective capital structures which may include, 1) paying off existing debt, 2) incurring new debt, and /or 3) declaring some type of special distributions. Each of the foregoing capital structure actions may require board consideration and approval, but, taken together, will present some additional challenges for the board. In situations in which the board is authorizing new debt, as well as a special distribution (cash or shares), boards can be exposed to claims that they either impaired the capital of the enterprise or authorized a distribution which constituted a fraudulent conveyance. While an officer’s certificate regarding the solvency of the business, pro forma for the transaction, is a helpful management tool, it falls well short of a contemporaneous, third-party assessment of various dimensions or commonly accepted determinations of solvency. Many boards obtain just such advice.
Faye Wattleton, who leads A&M’s Corporate Governance advisory practice and has served on the boards of such companies as Estee Lauder, Empire Blue Cross and Blue Shield, and Columbia University, observes that:
“Fiduciaries are obligated to discharge their duty of loyalty and care with reasonable diligence. Business judgment protection is not impenetrable. Boards are increasingly expected to demonstrate diligence in basing strategic decisions on quality information. This often requires independent, expert advisors, which may be especially desirable for an unproven spinco board to assure sustained shareholder value. Boards are entitled to rely on such advice as part of their deliberations on material corporate events. The spin-off of a major operating unit certainly qualifies as a major corporate event.”
Avoiding the "Cookie-Cutter" Approach
The utility of independent advice is correlated with the experience of the provider. All too often, purely financial advisors apply the same set of "one size fits all" tools to vastly different circumstances. Take, for example, the spin-off by a major coal company of its eastern U.S. coal business. The spin-off and related recapitalization was approved by the board which, presumably, had the benefit of both an officer’s certificate of solvency and the solvency opinion of an independent advisor. The independent advisor’s opinion regarding solvency would typically include an assessment of the borrower’s ability to address debts (including contingent liabilities) as they become due. In this case, however, the failure of the board (and theoretically its independent advisor) to consider known or knowable costs related to healthcare and environmental liabilities called into question the board’s duty of care, as well as the value of the independent opinion provided to the board.
The case highlights the importance of engaging an independent advisor that has the requisite operational industry experience to understand the macro-economic and regulatory factors that would impact coal demand and pricing, required emissions control / reduction equipment investments, and an appropriate adjustment for post-retirement remediation costs. (Particularly given the fact that spinco subsequently declared bankruptcy, and claims of a fraudulent transfer were alleged.)
Clearly, the subtleties of remainco’s and spinco’s business model should be completely understood by the financial advisor preparing a solvency opinion. Possessing operational talent (e.g., team members that have actually run businesses in the relevant sector) would be a clear enhancement to the overall project. Using the utility sector as an example, one could leverage the operational experience of such team members to evaluate the management plan for modeling revenues as (or when) formal power purchasing agreements roll off. If the term structure of debt includes maturities beyond the period covered by contracted revenues, such forecast assumptions would be critical to understand. Failure to appreciate the relationship between debt maturity and the term of contracted revenue streams was certainly criticized in the bankruptcy of EBG Holdings (the parent of Boston Generating) after its recapitalization and the declaration of a substantial distribution to its equity investors.
Conclusion
While there seems to be no indication that spin-off transactions will be out of favor anytime soon, and candidates for such transactions are plentiful, the axiom “if you are going to do it, do it well” should apply. No doubt, executive leadership and the investment banking advisor will convey a sense of urgency, or window of opportunity, to complete the spin-off transaction. With an experienced set of advisors and a great deal of focus, there is no reason the organization cannot be both nimble and rigorous. Markets have demonstrated a willingness to reward those who execute well and punish those who do not.
Authors:
Phil Wisler
Managing Director
+1 267 507 3135
Keith Kushin
Senior Director
+1 267 507 3124
For More Information:
Valuation Services

Social, Mobile, Analytics and Cloud (SMAC) technologies are allowing companies in every industry to re-imagine the possibilities and adopt progressive business models to compete in the As-a-Service economy.
After five or more years of shedding assets just to survive, many companies are now urgently focused on reigniting growth. The imperative is to avoid becoming the next Blockbuster — a household name that was forced out of business by more nimble and technologically innovative competitors like Netflix.
But how can companies get back to growth when they face challenges such as reduced capacity and legacy systems / processes that fail to deliver the innovation and productivity they need? For many, the answer is to quickly harness Social, Mobile, Analytics and Cloud (SMAC) technologies to create profitable new business models and establish leadership in the As-a-Service economy. These same techniques allow for greater agility and streamlining of internal operations.
As-a-Service vs. Traditional Models
As-a-Service refers to outcome-oriented provisioning of assets as an alternative to the traditional model of buying products. In our consumer lives, we all experience this model when we buy music through iTunes, as opposed to paying for a physical CD. In this new model, organizations elect to rent or subscribe to an outcome, rather than buy and build their own capabilities. Service providers bundle assets and work into defined outcomes that they provide to buyers at defined prices.
In the As-a-Service economy, leading companies are using SMAC tools to streamline their business models around what their customers truly want – whether it’s on-demand movies or hassle-free shopping, or even the processing of expenses or deploying service staff. Fundamentally, they have re-allocated, re-aligned or re-sourced activities that do not directly enable their ability to deliver customer value.
As a result, they are achieving high levels of predictability, efficiency, repeatability and alignment with customer expectations. These performance gains ultimately raise the bar across all industries and make it difficult for companies with legacy business models to keep up.
Benefits: Driving Reinvention and Growth
With As-a-Service, a company can reinvent itself, rapidly change its growth trajectory and leapfrog its competitors in capitalizing on profitable new markets. The benefits of progressive business models align closely with what many companies now consider their highest priorities:

• Drive new sources of revenue either through new service offerings, new channels or new target markets and customers
• Deepen customer affiliation / loyalty through better, more predictable service
• Improve profitability by taking out slack and inefficiency from the supply chain and improving margins
• Improve return on invested capital (ROIC) by procuring operating infrastructure as a service versus buy / build and leveraging existing capital assets more broadly and efficiently
• Enable agility to quickly detect and respond to changing market situations

Through the adoption of As-a-Service principles, companies can also explore benefits in such areas as refresh of sourcing arrangements, avoidance of capital expenses, vertical integration of business support functions, data monetization to create value from information and the repurposing of discrete product offerings into integrated services.
Given these and other benefits, now is the time for companies to scrutinize their balance sheets and challenge the status quo of build / buy versus rent / subscribe. Doing so can lead to clear performance improvements, free up investment for innovation and uncover new sources of revenue growth while enhancing ROIC.
The A&M Advantage for As-a-Service
Alvarez & Marsal (A&M) has invested to create a new Enterprise Services practice to help clients shift to progressive, As-a-Service business models that accelerate growth. With strategies for using SMAC technologies to better deploy resources such as people, partners and capital assets, we can enable our clients to both run the business more efficiently and serve clients more effectively.
Today, we are actively engaging clients on the design and implementation of progressive business models by drawing on many parts of the A&M experience base, including tax, transaction advisory, valuation, corporate finance, and regulatory and risk management.
Ultimately, the A&M approach to As-a-Service transformation provides advantages to clients in three related ways. We help to imagine and blueprint new business models – leveraging our insight and creativity to define the possible; we build the business cases for both internal and external application of As-a-Service principles – enabling decisions for change; and we manage the transition from “old world” to “new world.”
Promises Kept: Delivering Transformation
One example of how A&M helps clients transition to this new world is our work with a large U.S. retailer on a strategic assessment. The goal was to deliver a capability and technology roadmap that would enable the retailer to support emerging business strategies and evolve its capabilities. Through this collaboration, the retailer was able to use data analytics to provide visibility into its supply chain while personalizing the customer’s in-store experience.
On another project, we helped a global communications company grow via the addition of a new business model. The company’s stranded software and patent assets were poorly leveraged and generated minimal revenues. A&M defined the external market offering, identified specific customers, confirmed interest and created a roadmap for execution for these advanced technologies. Today, these previously underperforming assets are forecasted to grow into a $1 billion business in three to five years.
A&M also recently helped a global alternative investment management company address the excess costs of its under-utilized data centers by moving to an Infrastructure-As-a-Service (IaaS) model. Our solution improved the client’s CAPEX / OPEX structure and operational efficiency, while enabling it to better manage demand and provision services that meet organizational needs.
Imagining Our As-a-Service Future
Every company is now a participant in the As-a-Service economy, as buyer, service provider or both, and traditional business models like Blockbuster’s are being overtaken every day via innovative uses of SMAC technologies. In this new world, every A&M client is a potential buyer of advisory services related to new business models and technology architecture. This dynamic presents opportunities for A&M to change the client conversation from cost to growth and expand our influence and value within the client organization. We have the skills and experience to be our clients’ partner on this As-a-Service journey, and we now have an Enterprise Services team to help coordinate our response to clients and ensure the necessary skills set and selling assets.
Author:
Peter Allen
Managing Director
212 763 1616
For More Information:
As-a-Service

As cyber attacks become more sophisticated, the energy sector’s valuable data has been increasingly targeted. In a piece for Lexis Nexis, A&M’s Tom Kellermann and lawyer Brian Finch detail some infamous cyber assaults and explain how an evolved risk management strategy can help mitigate an attack.

According to the Center for Medicare and Medicaid Services (CMS), national healthcare expenditures increased 3.8-4.2% in 2008 through 2013 ¹– with the decline in the rate of growth attributed to factors that include the Patient Protection and Affordable Care Act (PPACA), lingering effects of the “Great Recession,” increasing employer cost shifting (to their employees), patent expirations and generic drug utilization, and more efficient and effective provider practices.

Alvarez & Marsal believes that the primary driver of this slowing expenditure growth has been a combination of weak job growth, the decline in household income and a rising percentage of household spending resulting from healthcare. A drop in utilization has masked the negative impact of rising prices secondary to hospital consolidation and acquisition of physician practices, continued misalignment of financial incentives and aggressive pharmaceutical pricing for branded, specialty and oncology drugs. An acceleration of spending growth is forecast by CMS to 5.7-7.4% in 2014-2018.

Rising Costs Affecting Consumer Behavior

Employee out-of-pocket expenditures, inclusive of insurance premium cost share, deductibles, co-payments and co-insurance have grown rapidly during the past few years, and are now approaching $5,000 per annum for family coverage at large companies. Real household income adjusted for inflation has declined 8.1% from $56,779 in 2008 to $52,163 in 2013, whereas the worker contribution for health insurance premiums have increased 36.1% from $3,354 to $4,565 during this period.² Under PPACA, the maximum annual out-of-pocket spend for individuals cannot exceed $6,350, whereas for families the figure is $12,700.

Rising premiums have also led to rapid growth of high-deductible health plans (HDHPs) or those with a minimum deductible of $1,250 for self-only coverage and $2,500 for family coverage. These HDHPs were formerly considered to be catastrophic health plans due to their low monthly premiums, and are a requirement for opening a health savings account using pre-tax dollars to pay for healthcare expenditures.

Higher out-of-pocket costs are affecting consumer behavior, including the overall utilization of health services. Approximately 30% of consumers have deferred visiting a physician, undergoing a test, filling a prescription or complying with treatment due to economic reasons. In one-third of all cases, the consumer believes treatment was delayed for a serious condition. Worse outcomes and higher costs are likely as preventable or reversible conditions progress to more severe forms.

Out-of-Pocket Costs Challenging With Public Exchanges

The health exchange premium subsidies provided for by PPACA does not eliminate the significant out-of-pocket cost burden for many Americans. Americans earning up to four times the 2013 federal poverty limits (FPL), $45,960 for an individual and $94,200 for a family of four, are eligible for premium subsidies.³ The U.S. Census estimates 93.4 million households, 76.3% of the U.S. total, have household incomes below $94,999; the median household income is $49,455.^4,5

It should be noted, however, that insurance premium subsidies for the Bronze, Silver and Gold plans listed on health exchanges account for 60%, 70% and 80% of the expected cost of health care services, leaving significant out-of-pocket expenditures for those with costly medical conditions despite PPACA-mandated reductions in out-of-pocket maximums by 33-67% (for those purchasing Silver and Gold plans).⁶

Impact of Treatment Deferral

Although positively impacting the short-term health care expenditure growth rate, the deferral of health resource utilization by individual patients, especially those with chronic disease, is likely to have negative cost and health consequences. According to the Kaiser Commission on Medicaid and the Uninsured, the consequences of postponing or foregoing care include: “condition got worse (60%), increased level of stress (54%), caused a significant amount of pain (46%), loss of time at work or other activities (31%) and / or caused a disability (13%)”.⁷ The survey results (although from the uninsured) are directionally applicable to insured patients also postponing or foregoing care. Opportunities for primary and secondary prevention, as well as earlier intervention are essentially being “lost.”

Conclusion

Healthcare costs are forecast to rise in 2014-2018 for myriad reasons including rapidly aging demographics, increased insurance coverage, the elimination of pre-existing condition exclusions and caps on spending, and provider consolidation. Higher out-of-pocket consumer spending, a fixture in employer health plans in 2008-2013 requires moderation as baseline declines in service utilization, medication compliance and treatment adherence normalizes, and the economic and health consequences of deferred and foregone treatment become apparent.

Employers need to further engage and incentivize employees to better manage their own health, as well use analytics to identify and allocate case management resources to high-cost and high-risk patients. Reference pricing and narrow networks could potentially generate cost savings to, at least, partially offset the rise in premiums.

Providers need to recognize that a fee-for-service model and higher-priced hospital outpatient department prices are not sustainable. Opportunities exist for providers to work with their own employees to assess care delivery costs, implement care-continuum efficiencies and use analytics to better manage risks; and longer-term, develop insurance company capabilities to facilitate direct-to-employer contracting.

Consumer affordability remains essential to provider selection, clinical outcome and employer productivity.

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¹ CMS National Health Expenditure Projections 2011-2021

² Short D. Real Median Household Income: Month-over-Month Slippage But Off Its 2011 Low. Advisor Perspectives; Dec. 31, 2013.

³ Families USA. 2013 Federal Poverty Guidelines

⁴ U.S. Census Bureau. Current Population Survey (CPS).

⁵ U.S. Census Bureau. CPS: Annual Social and Economic Supplement.

⁶ Kaiser Family Foundation. Focus on Health Reform: What the Actuarial Values in the Affordable Care Act Mean; April 2011.

⁷ Kaiser Low Income Coverage and Access Survey. Spotlight on Uninsured Patients: How Lack of Coverage Affects Patients and Their Families; June 2007.

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Healthcare

With the popularity of cloud storage on the rise, security concerns are growing. As A&M’s Tom Kellermann explains on Bloomberg Television's In The Loop, intellectual property has become “the commodity of the 21st century,” and the cloud is like “watering holes in West Africa where the predators will hunt.” Are you prepared? 

Bank regulators’ expectations for board governance, committee oversight and risk management are high and rising.  The bar has been raised, and the end is nowhere in sight.   Two recent releases stand out.  The Board of Governors of the Federal Reserve System (“FRB”) finalized its rule on Enhanced Prudential Standards for Covered Companies[1] and The Office of the Comptroller of the Currency (“OCC”) proposed Guidelines Establishing Heightened Standards for Large Insured National Banks, Federal Savings Associations, and Federal Branches[2], which combines many elements of the OCC’s Satisfactory-to-Strong (“S2S”) program.  The final rule and the proposed guidelines both raise expectations for board and committee oversight and governance of risk.

 A natural consequence of these heightened supervisory expectations is that banks must raise the bar on the quality of board risk management reporting.  Risk and risk management reporting must be sufficient to allow informed and effective risk oversight and governance.  Previously, the quality of risk reporting may have been perceived as “nice to have.” Now it is essential.   

The rule and proposed guidelines clearly establish regulatory expectations for quality reporting to the board of directors, though they fall short — as rules often do – in providing details regarding what is necessary to meet board oversight and governance needs and regulatory expectations.  Do not let the absence of specificity fool you. We know from experience that regulators will find risk reporting inadequate if it does not analyze and synthesize data, transform data into information, and draw out issues and risks for dialogue, challenge, debate and action.  Board members should, and regulators will, expect substantive analysis.  Reams of paper and exhaustive lists of data will not make the grade.  Neither will “elevator reports” (i.e., this went up, this went down), snap shots or dashboards that do not put risk into perspective relative to time, earnings and capital, tolerances and expectations, and the environment.  To be meaningful for effective board and governance and adequate to meet regulators’ expectations, risk management board reporting must regularly, clearly and succinctly provide risk committees and board members timely and accurate information born from good analysis and synthesis of underlying data about current and prospective risks, and on the efficacy of the banks’ risk management program.  In general, board risk committee reporting should:

• Draw directors’ attention and discussion to issues and risks that require their input, guidance and action.  A risk dashboard can be helpful in focusing attention on risks and issues for discussion, consideration and action.  Dashboards should focus on levels and trends in risk and the effectiveness of controls, highlight outsized risks and those moving quickly in that direction, show imbalances between risk levels and risk management and controls, and call attention to the need for improvement or intervention.  However, dashboards and other risk reports must provide a framework for informed governance. They must be more than “pretty faces.”

• Focus attention on external and internal environmental factors affecting risk and risk management. External factors affecting risk or risk management may include trends in underwriting standards or consumer or corporate leverage; changes in market prices, liquidity or volatility; significant events and trends affecting risks in certain businesses, industries or geographies; and new or changing legislative or regulatory hot-buttons, such as money laundering, structured products, unfair, deceptive or abusive acts or practices. Internal environmental factors may include compensation systems that incentivize undesired behavior, cost cutting initiatives that may affect operational or other risks, trends in the number and severity of the findings of independent control functions (audit, loan review, compliance testing, etc.)  or matters requiring attention presented by a bank’s regulators.
• Present risks and risk trends in absolute terms and relative to expectations. This may be done using budgets, plans, or targets; risk tolerances and limits; early warning / escalation thresholds (trip-wires); and risk measures presented relative to capital (economic and / or regulatory, whatever the binding constraint), assets, earnings and peer data where available.  These should be accompanied by sufficient analyses and succinct analytical commentary about underlying root causes to answer three fundamental questions: “Why?,” “What does it mean?” and “What needs to be done?”  
• Provide information on the quality of risk management and trends in the effectiveness of risk management. This information should be in the form of summarized risk control self assessments, audit or loan reviews, or findings from regulatory or compliance testing.  It is essential that independent review groups are candid and clear in their assessments and in explaining the basis of their assigned risk and risk management conclusions.  They must cite as many objective metrics and key risk indicators as needed to support their conclusions.
• Provide, to the extent possible, forward measures of risk, say over the next 12 months.  In particular, liquidity and capital adequacy levels and trends should be reported relative to the current and prospective risk profile of the company, both expected and stressed.  Credit metrics, like past due and loss percentages, are helpful in assessing trends in asset quality but must be supplemented by default probabilities and expected losses, which measure forward expectations of risk and trends therein.
• Build in early warning indicators.  Key Risk Indicators (KRIs), metrics and limit thresholds should be designed to focus on changing risk levels and trends at a stage in which they can be discussed and acted upon before the risks can cause material harm to the institution.      

Conclusion

As board and risk committee members reflect on their heightened responsibilities for risk management, they need to know they are getting the risk reports they need.  Boards should be assessing the adequacy of existing risk reports relative to their risk oversight and governance responsibilities and their fiduciary duties. 

Risk reports should afford directors the opportunity to easily focus on, and dig into, the details of the institution’s activities and their associated risks. Board risk reporting should enable board members independent analyses and allow them to draw informed conclusions. Uninformed or ill-informed directors and risk committee members cannot effectively oversee and govern what they do not know.   “Blind governance” exposes the institution to unacceptable risks and will fail regulatory scrutiny.   

Over the past decade, the reaction to criticism leveled at change in control agreements (or “golden parachutes”) has been to continue the trend towards either eliminating them or reducing the amount payable, often substantially. This response is understandable, but golden parachutes can actually protect or even enhance (rather than diminish) shareholder value in certain circumstances, making their removal ill-advised.

The Origin of Parachutes

The late 1970s and early 1980s was the era of hostile tender offers by one public company for another. In this climate, two simultaneous concerns arose: chief executive officers worried that, if the transaction was consummated, an acquirer intent on cutting costs would terminate them, while shareholders (and, through them, boards of directors) worried that a CEO who was concerned with his personal situation would not act effectively to complete a transaction expected to bring substantial value.

Golden parachutes eliminated these concerns by providing executives with a specified level of compensation if (i) there was a change in control of their company, even if they did not lose their position (a “single trigger” agreement) or (ii) a change in control occurred, followed by their termination of employment (a “double trigger”). Eventually, a third alternative, a “modified single trigger” came into play – requiring an executive to remain for a specified period following a change in control, after which he was free to terminate and receive the promised compensation.

In response to criticism that these agreements provided executives with excessive benefits, Sections 280G and 4999 of the Internal Revenue Code of 1986 were enacted. These provisions imposed a 20 percent excise tax on an executive who received an “excess parachute payment” (i.e., a payment in excess of three times his average compensation for the five years preceding the change in control) and denied the payor corporation a deduction for that amount. If the “safe harbor” amount is exceeded, the excise tax will apply to the amount paid in excess of one times the average five-year compensation. In response to section 280G, agreements generally began to provide for:

 1. An amount in excess of the 280G limit; such agreements often included a “gross up” payment to make the executive whole for the excise tax he paid.

 2. An amount limited to 2.99 times the executive’s five-year average compensation (the “2.99 cap”).

 3. A so-called “best-of-both-worlds” or “valley” provision, whereby the executive received the full parachute payment if it would net him more after-tax income than would imposing the 2.99 cap.

These types of provisions, including the gross-up provision, remained in usage until the last few years when criticism of them exploded.

The Main Issue

Much of that criticism came from Institutional Shareholders Services (ISS) and Glass Lewis, proxy advisory firms whose recommendations have carried significant weight with institutional investors in Say-on-Pay and other votes. These firms viewed the gross-up as a corporate giveaway that should be eliminated and the valley provision as potentially as bad (because the result could be the same as with the gross up).

While many companies might have disagreed with this assessment, few chose to do battle with ISS and / or Glass Lewis over the issue. The predictable result has been that very few new employment or change-in-control agreements include gross-ups. Moreover, as existing agreements have been renewed, a gross up has been eliminated from many. Some companies did not even wait for renewal, but amended existing, valid agreements to remove a gross-up provision. The executives affected by this action probably felt somewhat betrayed, but had little recourse unless they wanted to engage in a public fight with their boards. Use of valley provisions has also declined, though not quite as dramatically.

Not to Be Ignored

Even though the heyday of hostile tenders has passed, the fiduciary issue that prompted the creation of golden parachutes has not (and should not) be ignored. For example, consider a CEO who is in his mid- to late-50s; whose company is “in play,” who believes it is highly likely that he will be terminated if a transaction is successfully completed, and who has only normal corporate severance to cushion a loss of employment. Looking at the reality of the marketplace, that CEO could well conclude finding a comparable position would be difficult, perhaps even impossible. Under such circumstances, shareholders could question whether the executive will do everything in his power to ensure that a proposed transaction is completed, thereby maximizing value for them.

A 2.99 cap is unlikely to fully ensure against such an outcome, inasmuch as three years compensation could still leave the above-described CEO unemployed (and unemployable) at an age when he wants to continue working. The lack of any parachute or even a 2.99 cap also may not be appropriate when a CEO is being recruited by a company that is seen as a potential target. In the past, some companies attempted to solve the latter issue by providing for compensation above the 2.99 cap for a specified period, after which the cap would come into effect. This is a sound strategy that should be acceptable to ISS, Glass Lewis and large institutional shareholders. In the current climate, however, there continues to be resistance to any provision that even theoretically can provide a payment above the cap and the use of such provisions has declined.

Conclusion

A return to the days of single trigger agreements with no cap and with a gross up is not the answer; and neither are payments sufficient to cause a dollar-for-dollar adjustment in the purchase price. The pendulum can sometimes swing too far in the opposite direction from a perceived abuse.

Instead, it is time for public company boards to assert their authority and utilize the provision that they believe will bring about the best result for the company’s shareholders, even if the payment is nearly certain to bring outrage from some quarters.

Author:

Arthur Woodard
Managing Director
+1 212 763 1967

For More Information:

Executive Compensation and Benefits

Executive Change in Control Report 2013 / 2014