The prospect of 21st Century Fox acquiring Time Warner has Wall Street and Hollywood bracing for a wave of mergers and acquisitions to hit the media sector. Conventional wisdom holds that entertainment conglomerates must bulk up to counter the size of tech giants like Google and the pending combinations of Comcast/Time Warner Cable and AT&T/DirecTV.
But there’s another factor that’s been overlooked: high-ranking executives whose employment contracts are larded with “change in control” clauses. Think of these as the gold standard for golden parachutes, provisions that trigger huge payouts in the event of an ownership change that ousts the selling corporation’s senior management.
If Time Warner CEO Jeff Bewkes had accepted Rupert Murdoch’s $85-per-share bid last week, for instance, he could have collected incentives worth more than $95 million, according to calculations based on a Time Warner proxy filing with the Securities and Exchange Commission in April. Of course, if the price goes higher, so does Bewkes’ payout.
And Bewkes is hardly alone; his chief lieutenants would have also collected additional millions of dollars. No wonder change in control has drawn criticism for potentially incentivizing CEOs to engage in M&A that may be more beneficial to themselves than to the companies they represent.
“These compensation packages run the risk of motivating CEOs to go after bad deals because of the personal profit involved,” said Sanjay Sanghoee, a former investment banker who worked on many media pacts while with Lazard Freres and Dresdner Bank.
A person close to Bewkes insists that this is not the case with the Time Warner chief, who has been leading the charge to fend off Murdoch’s advances. Bewkes personally called Murdoch and his top lieutenant, Chase Carey, to reject Fox’s $80 billion bid on June 9, this person says. Bewkes and the board argued that Murdoch’s offer was too low to accept, and that they want time to execute on the strategic and financial goals laid out in their five-year plans to grow Time Warner.
But many on Wall Street and across the media business are convinced that despite Bewkes’ efforts to fight off Murdoch, he has in fact made Time Warner an attractive takeover target that will likely change hands sooner rather than later.
“The urgency to find a dance partner will increase across the sector,” said Todd Juenger, senior analyst with Bernstein Research. “Nobody wants to be the company that gets left out of the consolidation wave, and companies would rather control their own destinies.”
Just last month Bewkes, who took the reins in 2009, completed the spinoff of his conglom’s Time Inc. publishing unit, the final piece of a multi-year strategy to shed non-core assets and return the company to a pure entertainment concern. AOL and Time Warner Cable were jettisoned in 2009, and Time Warner didn’t make any significant acquisitions over that time.
A source who has worked in management with Bewkes suggests the spinoffs speak to a long game the CEO has been playing all along to set up Time Warner for a sale.
Thanks to a sizable boost from the Fox overture, Time Warner’s stock surpassed $83 last week — nearly six times what it was when Bewkes became CEO six years ago, when the company was still trying to shake off the shadow of its calamitous merger with AOL. With the stock resurgent, the price-to-earnings ratio gap that once separated Time Warner from many of its fellow conglomerates is closing fast.
In computing bewkes’ $95 million potential windfall, $46.5 million would come from stock options and restricted stock units that would begin to vest, according to the April proxy filing. Another $31.3 million would come from the estimated value of performance share units that would vest. He also would be entitled to $1 million in other benefits. That adds up to a value of $78.8 million.
But the stock figures were based on the price of common stock on Dec. 31, which was $69.72. Murdoch’s offer was reportedly $85 per share, an increase of 22%. Factoring in that increased value of the stock, the entire package gets to just over $95 million.
That said, Bewkes could potentially make more if he stays through the end of the contract. He also doesn’t get any cash severance from his change-in-control clause, unlike some other CEOs.
But the problem with such accelerated vesting provisions is that they may allow senior executives to exercise options or cash out stock in the short term, rather than wait to see the value of the company over time.
“The accelerated vesting allows executives to walk out while pocketing big gains, when the purpose of the award in the first place was to create incentives for some combination of performance or retention,” said Gary Hewitt, head of research for GMI Ratings.
Bewkes’ contract runs through 2017; he signed a five-year extension in 2012. His total compensation package for fiscal 2013 was valued at $32.5 million. Because the board of Time Warner provides him with performance-based awards, it’s not possible to say what he would be getting in 2017 — though the total likely would be in the same ballpark.
At age 62, and working at a company with no mandatory retirement age for a CEO, Bewkes hasn’t shown any inclination to step down or retire, though that isn’t out of the realm of possibility. While Bewkes touted a “deep bench” within his management ranks at Time Warner’s annual meeting in June, there is no single clear internal successor, though insiders say Turner Broadcasting CEO John Martin would be high on any list.
Martin is among the other Time Warner executives who would receive substantial benefits from a change in control, according to SEC filings. He was the company’s chief financial officer before shifting to oversight of Turner, and would see a potential $26.1 million in options and vested stock if Warners shifts hands. For Paul Cappuccio, executive vice president and general counsel, the figure is $17.4 million. Gary Ginsberg, exec VP of corporate marketing and communications, would be entitled to $4.7 million, while Olaf Olafsson, exec VP of international and corporate strategy, would see his stock and options vest at an estimated $9.2 million. The figures were based on the Time Warner share price of $69.72 on Dec. 31.
While those numbers may seem high, they are not inconsistent with many contracts in the media sector, including other companies that have been mentioned as possible takeover targets.
David Zaslav, CEO of Discovery Communications, could reap a package valued at $222 million should that company be acquired and he subsequently lose his job, according to a proxy filed with the SEC in March. That figure includes $9 million in base salary and $21.3 million in bonuses.
What will trigger the compensation package? If the new owners terminate his employment “without cause,” or if Zaslav ends it for “good reason.” That latter could include Zaslav seeing his base salary reduced, his bonus “materially” reduced or a reduction of his duties. Even the relocation of his Discovery office more than 40 miles from its present location would be considered good cause — unless the new owner chose to relocate to midtown Manhattan.
Zaslav also has an agreement in which he has the right of first refusal on a portion of Liberty Media chairman John Malone’s shares, but only if Zaslav remains as CEO. The provision is perhaps a counterweight to the lucrative package Zaslav would receive should there be a change in control. A rep for Discovery declined comment.
If Zaslav’s potential payday seemsshocking, recall Time Warner Cable CEO Robert Marcus, who stands to earn a measly $80 million if his company is acquired by Comcast. But it’s an impressive sum, considering he was only in his post for two months at the time of the payout disclosure. Marcus has Bewkes in part to thank for the opportunity, considering it was Time Warner’s spinoff of its cable unit that paved the way for the acquisition.
The head honchos at other potential takeover targets may not have change-in-control payouts at the Zaslav level, but the sums are healthy just the same, including those of Starz CEO Chris Albrecht ($40.3 million), AMC Networks CEO Josh Sapan ($36.4 million) and Scripps Networks CEO Kenneth Lowe ($34 million).
So why do change-in-control clauses even exist? They first emerged more than 30 years ago as a means of protecting CEOs who might otherwise avoid M&A activity for fear of losing their jobs. But the payouts became so gargantuan that the SEC moved in 2006 to require public disclosure of employment agreements. Four years later, the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act allowed shareholders to vote on CEO compensation (though the vote is technically nonbinding).
Brian Cumberland, national managing director of compensation and benefits at Alvarez & Marsal, said these recent measures have helped. “The boards at companies nowadays are taking the reins back in setting compensation and determining what’s reasonable,” he said. “Just a couple of years ago, they didn’t really understand or appreciate how much was being paid.”
Indeed, studies show these colossal windfalls are on the wane. Thomson Reuters Journal of Compensation and Benefits found that the number of severance packages which paid CEOs three times their salary had fallen to 38% in 2011 from 53% in 2007. There also have been steeper drops in the amount of so-called “single-trigger” payouts, which awarded CEOs even if they remained with the company after an acquisition; and a practice known as “grossing up,” in which companies covered the cost of taxes on these payouts.
That said, individual change-in-control packages haven’t seen their value ebb much in recent years. The average clause commanded just under $30 million last year among the top 200 publicly traded companies in the U.S., according to a study released in March by Alvarez & Marsal — about the same as it was two years prior.
Time will tell whether these incentives grease the wheels of mega-dealmaking.
Not everyone believes there’s anM&A cascade coming. Media players are not in a desperate panic to pair up, evidenced by Time Warner’s rejection of the Fox overture.
“While we think Fox and potentially others will continue to look at (Time Warner), given its attractive portfolio of assets, we do not see a large wave of M&A activity on the horizon for the group,” said Jefferies equity analyst John Janedis.
Regardless, the guessing game about which giant swallows which will continue. For now, all eyes remain on Fox and Time Warner. “Murdoch has shown his hand,” Janney Capital Markets analyst Tony Wible said. “When he shows interest in an asset, he’s going to keep coming back.”
Todd Spangler and Brent Lang contributed to this report.