Extraordinary merger bonuses at Pfizer

Now, the amounts aren’t much, $1 million, $1.2 million, but let’s stand back a bit and look at the principal of the thing. The announcement last week that the CFO and a senior VP at Pfizer had received bonuses for extraordinary efforts and extraordinary contributions to the Wyeth merger gets us to think about the principal of merger bonuses.

I guess the impetus behind them is: “Haha, we’ve done it.” Big handshakes, slapping of backs, congratulations all round. It’s like winning a football game – that’s soccer to you – except that it isn’t. When Leeds United beats Manchester United (just indulging in a bit of wishful thinking here) the result is clear. Incontrovertible. When two companies merge the result is, well, that they have merged. Just because you think it’s a good idea doesn’t mean it is one.

The filing even admits it. It says: “begin realizing the substantial projected benefits of the combination following the closing of the transaction.”

In other words no benefits have been realized yet. They might never be realized.

So a merger bonus is someone getting paid for something that not only hasn’t happened, but may never happen.

So why do they keep doing it?

I was just on a call with an investment group and they were asking exactly the same questions. So it isn’t just me.

And the Pfizer bonuses? Well, that half of them were paid out in stock units of some form that will only vest after three years depending on continuous service mitigates some of the problem, but even that doesn’t mitigate it all. The cash is money down the drain, but the stock units…. Their eventual value will depend on the value of Pfizer’s stock which will be influenced by the success of the merger, the realization of those substantial benefits. But even if the benefits aren’t realized or even if the stock goes down, the units will still pay out after three years.

So let me spell it out in capital letters, the right way to do this. The timing of the award is right, just after the merger, but MAKE THE VESTING OF IT ACTUALLY DEPENDENT ON REALIZING THE LONG-TERM BENEFITS OF THE MERGER. And not just on hanging around for another three years.

Paul Hodgson — Senior Research Associate

Comments

[Melissa Craig]

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Let us not forget that the research shows that a small minority of mergers generate returns that either meet the acquirer' originial projections or even exceed the cost of capital.

In other words, the merger destroys value.

Melissa Craig
Practical Turnaround Management

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[Melissa Craig]

That was supposed to be: "meet the acquirer's original . . ."

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