Tuesday, March 10, 2009

Merck/SGP: Change of Control and Executive Pay Collide

There are several reasons Schering-Plough chief executive Fred Hassan sounded upbeat on the conference call this morning to discuss the $41 billion deal he worked out with Merck. One possibility is that Fred, 63, may walk away with nearly $60 million in the event of a change of control, according to the proxy statement filed last spring, which is the most recent available.

Granted, this could change a bit, because the payout is calculated, in part, by using the Dec. 31, 2007, closing stock price of $26.64. And who knows? Maybe Merck will try to argue the change of control provision doesn't apply, since the deal is structured as a reverse merger. On a conference call, Merck execs insisted the deal isn't a change of control in order for Merck to keep Johnson & Johnson from grabbing international rights to Remicade and a follow-up drug.

However, Schering-Plough's corporate secretary, Sue Wolf, says the deal will likely be considered a change of control for the purpose of executive payouts, according to a Schering-Plough spokesman. So maybe these drugmakers want things both ways?

In any event, it would appear from reading the proxy that Schering-Plough execs were given big incentives to get a deal done. For instance, Fred would get only $37 million if he were terminated prior to a merger, but would receive $56.3 million if booted after a change of control, roughly the same amount under a change of control in which he remains without being terminated.

And Carrie Cox, an executive vp, would get $22.8 million if there's a change of control and $23.7 million if terminated after a change, but just $13.3 million if terminated prior to a change. And Bob Bertolini, the CFO, would $19 million with a change, $12 million if booted before a change and $27.5 million if shown the door after a change. With paydays like that, why hang around? The SGP execs could be big winners, and walk away with enough money to dole out their own stimulus packages (take note former Schering-Plough employees).

Assuming Fred wins, he may receive close to $60 million, anyway. His options may have been underwater or certainly worth less in recent months, but the deal with Merck is moving the stock closer to the December 2007 closing price. And that doesn't include another $3.9 million in phantom stock awarded late last month, while negotiations with Merck were taking place.

Whatever the final number, the payout will likely be memorable and may even generate some debate. On one hand, Fred managed to get a 34 percent premium out of Merck's board, which is better than nothing given the stock market these days. And for all we know, maybe a higher price will materialize if Johnson & Johnson were to bid over fears of losing those Remicade rights.

However, the flap over Vytorin clinical trial data happened on Fred's watch. There's also the notion that, at a time when the global economy is tanking and corporate excess is not cool, perhaps the payout is too large and the Schering-Plough board should have been stingier. What do you think?

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