The email was sent less than forty-eight hours before the scheduled meeting, but nearly everyone attended and many appeared dressed for a job interview. Name placards had been placed on the large conference table and on the twelve additional chairs lined up in the rear of the room. The assigned seating resulted in some abnormal navigation as people attempted to locate their seats. Once seated, it was clear there was a hierarchy to the assignments, with the CEO and COO next to one another at the head of the table, department heads around the table, and function directors and the payroll manager in the chairs at the back. At each place was a seventeen-page handout that looked as though it had been quickly assembled – definitely not anything corporate communications had a hand in – thin white copy paper duplicated on a copier desperately in need of a toner cartridge replacement, and hand stapled in the upper left hand corner. The handout was titled: The Easton Company Merger Instructions for Key Employees – Highly Confidential. DO NOT COPY OR CIRCULATE.
Two function heads seated in the back tried not to snicker as one whispered to the other, “How would they know?” as she pointed to the faded DO NOT COPY text.
Once everyone was settled, the only person missing was Jeffrey Elkins. His name tent clearly labeled where he was supposed to be. Lee Martino checked his watch a few times, but at five after the hour he started the meeting without comment on the empty chair to his right.
“Thank you all for coming,” Lee began. “As you know, the merger process has begun with Pratt-Miles assessing and evaluating not only our company assets, but also the processes, functions, and methodologies we use to run our business.”
At that point the door opened and Jeffrey Elkins strode into the conference room. Lee paused and all eyes followed the CEO as he quickly moved around the table and took his place. Lee glanced sideways at Jeffrey whose eyes were fixed squarely on his name tent.
“Welcome,” Lee said with a hint of sarcasm in his voice. Jeffrey gave a nearly imperceptible nod without shifting his glance from the tabletop.
“As I was saying,” Lee continued, “The document in front of you is designed to provide some guidance over the next several weeks as Pratt-Miles goes through the process of pre-purchase discovery. Each of you has been asked to attend this meeting because you will play an important role in this discovery process.” A few people shifted noticeably in their chairs, sitting up a bit straighter, listening a little closer.
“As department or function heads, you will likely be asked to meet with your Pratt-Miles peers and other representatives to answer questions about what you do and how you do it. First, let me say that we expect your full cooperation during this process. But let me be very clear. Cooperation does not equate to total access. There are certain lines here that should not be crossed without first consulting our legal team. It’s not that we are attempting to hide anything during this process. Our books are open to Pratt-Miles during this period. However, what we all must keep in mind is that Pratt-Miles at this point is still our competitor. There is always a possibility that this deal could fall through.”
Jeffrey now held his name card in his hands, rotating it slowly and carefully using both index fingers and thumbs. Those who could see his face thought they noticed the smallest smirk pass his lips. At that moment the tension between the two men seated at the head of the table was palpable. It was clear that the assigned seating arrangements had been some overeager administrative assistant’s nifty idea run amuck. Seating the CEO and COO shoulder-to-shoulder during this meeting had been a bad decision. Lee paused and the attendees shifted again in their seats, flipping pages in the handout.
“Bottom line here is you’re all smart people. Answer the basics, but don’t turn over any document without sending it through legal. Pratt-Miles is aware this is how things will be handled. All documentation requested will be catalogued, copied and sent to Denver once it has been screened by our attorneys.”
This was the point in the meeting when it dawned on most attendees why they were there. It wasn’t because they were special, important or key to the merger in any way that was noteworthy. All of them were mid and upper level managers – non-executives every one. They were present because the company needed them to be the workhorses a little while longer without screwing up the proceedings. Lee was working hard to make the people in the room feel like there would be an important role for them in the merger – that it was more than just an acquisition. The objective of the meeting, however, was to win cooperation from a set of employees with little to gain from “keeping up the good work” but whose help would be necessary during the transition. They were a group of employees who held needed information and performed very necessary administrative duties, but had no significant financial incentive to perform well during the run up to the sale.
“So please read through the handout and follow the instructions given. If you have questions let us know.” Plainly, Lee had no plans to entertain questions during this meeting.
That didn’t stop Barbara Mallery, the payroll manager, from raising her hand from the back row. “Mr. Martino?”
“Yes, Barbara,” Lee sighed.
“What about payroll data? I’ve scanned the handout and there’s nothing here that provides the kind of direction I need to determine what I should and should not provide during the discovery process.”
“Good question,” Lee rushed on, “but one I need you to take up with the legal team. Give Charles McKenzie a call when you get back to your office. I’m sure he can provide you the detailed guidance you need.”
Any hope of an elevated status for the invitees in the room had been overblown. Given the content of the meeting, their appropriate places were evident.
Lee turned to Jeffrey and asked politely, “Anything you’d like to add, Jeffrey?” The CEO glanced toward Lee and when they made eye contact Jeffrey responded casually, “No. I think that covers it.”
“All right then,” Lee stood up, “thank you all for coming.” The meeting ended and the group silently filed from the room.
It was the last time anyone present saw Jeffrey Elkins and Lee Martino speak to each other.
A Slice of the Pie
In the weeks between when a company announces its intention to merge and the date the merger actually closes, there is an interesting window of opportunity for investors. As usually happens when merger announcements are made, the stock price of the acquiring company goes down, while the price of the company being acquired goes up. The rationale here is easy to understand. The market knows that, in the short-term, the acquiring company will be spending time, energy and dollars to effect the merger; and it will be a year or more before the benefits of the merger will start showing up in their stock price. Meanwhile, on the other side of the merger, the company being bought has been offered more money per share than it is currently trading for – sometimes lots more per share. This is the so-called “spread.” Assuming the merger goes through, stockholders have a short-term, near guarantee that the stock price will go up to the offer price by the date the deal closes. If the stock price falls due to financing concerns, or if the merger doesn’t go through as planned, the stockholder may be disappointed. Still, many view the opportunity as a risk worth taking.
When a merger is in progress, an interesting subset of investors to watch are the 401(k) plan participants in the company being acquired. This is only relevant if the plan offers company stock as an investment choice. When merger announcements are made in these organizations, you can walk the halls of the company’s offices and hear those calculators clicking. Everyone with options, shares or 401(k) dollars invested in company stock is doing the math. The halls of The Easton Company were no different. The same question was on the lips of dozens of plan participants calling human resources: “Is there a freeze on company stock fund trading in the 401(k) plan? If not, can I continue to buy and sell shares of Easton stock in my 401(k) account up to the day the sale closes?” Surprisingly, there were no restrictions. It was one of the f
ew ways the little guys could get a piece of the last minute action.
With that answer in hand, plan participants were amazed that their Easton stock trading in the company 401(k) plan did not violate some insider-trading rule. After all, most management employees at corporate headquarters assumed they would have some clue if the merger unexpectedly headed south. A certain amount of caveat emptor still applied. If the deal fell through, the value of the shares would probably plummet. Still, if that happened, they might have time to sell before incurring losses.
Surprisingly, most Easton 401(k) participants did nothing with their plan investments in company stock. A handful chose to sell all their Easton shares as the close date drew near and the trading price increased toward the offer price. A small number bought a few more company shares in their 401(k) accounts as they witnessed the stock price begin to climb. Others chose to max out their annual 401(k) contribution amount with all the new money directed into Easton shares.
Only 3 participants out of nearly 2,000 bet the farm and moved all their 401(k) money into the company stock fund when the merger was announced. All three of these risk-takers were middle-aged males earning six-figure salaries, and they all worked in the Las Vegas sales office. This fact made human resources director Kate Cooper chuckle when she reviewed the weekly Trade Report for The Easton Company 401(k) plan. Unlike most Las Vegas players, these plan participants all hit the jackpot with their 401(k) gambles. Each had plan account balances in excess of $150,000 when the merger was announced.
One participant moved all his plan assets into the company stock fund, buying in at $34 a share. The stock paid out at $65 per share at close, just thirteen weeks later. His action netted him an increase of more than $136,000, nearly doubling his total tax deferred 401(k) account balance to just under $300,000 in those three months. The participant was amazed that the transaction was legitimate in the eyes of the Internal Revenue Service, the Securities and Exchange Commission, and Sarbanes-Oxley rules. This was certainly a serendipitous retirement planning vehicle no one had advised him about.
In the News
September 30
Developers Quarterly
Platinum Price Tag
Last month Pratt-Miles Inc. outmaneuvered two rivals to secure The Easton Company’s gold star portfolio. And though Wall Street critics are suggesting that Pratt-Miles is paying platinum prices for its acquisition, Pratt-Miles CEO George Miles says the $13.1 billion price tag is well worth it.
Most of the facts concerning the auction process that resulted in Pratt-Miles’ win are confidential, but a recent proxy statement Easton filed with the SEC reveals a few interesting details. For example, Easton executives approached Pratt-Miles and two other leading development companies to solicit bids after Easton CEO Jeffrey Elkins discussed possible sale of the company with George Miles over dinner in May. Following the conversation between Elkins and Miles, Elkins enlisted guidance from an international banking institution and a prominent brokerage firm to advise the company on a possible sale.
In July Easton contacted Pratt-Miles and another company (“Company A”) to solicit bids in the $70-to-$75-per-share range. By mid-August Company A withdrew from the auction, citing a reluctance to rush the arrangement of financing. Two days later Company B – who had initially responded but then grew quiet through the bulk of the negotiations – re-entered the discussion, requesting that Easton delay the sale process so it could make an intervening bid in the $65-to-$70-per-share range. But Pratt-Miles put forth its formal offer of $65 per share that same day, and Easton’s board voted to approve it rather than extend the bidding process. “Although both Company A and Company B had requested additional time to evaluate Easton and to present its best proposal, our board determined there were significant risks in extending the sale process,” the proxy statement reads. Those risks included the possibility that Pratt-Miles might withdraw or reduce its proposal or that the bidders might decide to bid jointly.
One thing is clear: the deal is a watershed event in the development industry because of its size and because it is a cash transaction. If anyone had suggested ten years ago that a competitor would buy The Easton Company for $13.1 billion, they would have been laughed out of the room.
Pep Squad
Working for a company about to be acquired is an odd and unsettling experience. The stress can make even the most dignified employees do some very peculiar things. On an afternoon in early September, several long-service legal secretaries appeared on the lawn under the CEO’s balcony and began conducting cheers. The group of seven was dressed in white slacks, tunics and tennis shoes and carried green pom-poms. All were AARP eligible. Bouncing up and down they chanted:
“Gimme an E!”
“E!”
“Gimme an A!”
“A!”
“Gimme an S!”
“S!”
“Gimme a T!”
“T!”
“Gimme an O!”
“O!”
“Gimme an N!”
“N!”
“What’s that spell?”
“EASTON!”
“What’s that spell?”
“EASTON!”
Employees in the building migrated to the windows to see what the noise was about.
“What do we want?”
“Our jobs!”
“What do we need?”
“Our pensions!”
“When do we want ’em?”
“NOW!”
Some onlookers laughed and cheered along. Just as many found the display embarrassing and turned away.
“It’s like watching my well-mannered mother make a fool of herself,” one young man muttered.
The group repeated their repertoire of chants twice more, then clustered together and sang loudly in two-part harmony:
"We love you Easton
Oh yes we do
We love you Easton
And we’ll be true
When it’s all over
We’ll be blue
Oh Easton how we’ve loved you!"
The watching employees hollered, clapped and whistled while the women took a bow.
Ten minutes later each cheerleader was back at her desk as though nothing out of the ordinary had occurred.
Once Upon a Time There Was a Merger and Other Fairy Tales
In late September, six weeks after the merger announcement, Easton stockholders received some interesting reading material in their mailboxes. Each was sent a proxy statement cordially inviting them to attend a special meeting of the stockholders held, not at the company’s corporate headquarters in Virginia as was the usual practice for such meetings, but at the offices of a prestigious law firm in Manhattan. The meeting was scheduled for 9:30 a.m. on a Wednesday morning in early November. There would be no customary luncheon of Chesapeake Bay crab cakes, prime rib and strawberry shortcake that had always followed the annual stockholders meetings. This meeting had one purpose: to vote on a proposal to approve the merger of The Easton Company and Pratt-Miles. It was no surprise that the notice endorsed the merger and the Easton board of directors recommended stockholders vote FOR its approval.
The proxy statement was actually an eighty-page booklet containing a lengthy narrative of the merger bid process and the merger agreement, laced with statistics on who would get what in the deal. Tables reflecting the different executive compensation categories were liberally sprinkled throughout prudently labeled as “interests of certain parties” and “considerations to be received.” The legally required language about rights, responsibilities and regulatory matters was layered at the end of the document.
Most stockholders never read beyond the section titled, “Consideration to be Received by Our Stockholders in the Merger” which confirmed in writing how much they would receive for their Easton stock shares. Some stockholders wanted to put their windfall in perspective, so they skimmed sections related to the executives’ golden parachutes – although they certainly weren’t label
ed as such in the proxy. Still other stockholders who were former employees or Friends of The Easton Company read the entire booklet from cover to cover; some even read it a second time with a highlighter in hand.
It was in this proxy document that the reading public first learned The Easton Company had actually been auctioned off to the highest cash bidder. The entire process of securing a buyer for the $13 billion corporation had taken less than eight weeks, from initiation to sale announcement.
But Easton’s retirees reading the proxy made a beeline to the one-page section labeled “Employee Benefit Matters.” The transfer to Pratt-Miles of The Easton Company’s benefit plans for non-executives was summarized in less than 500 words. A scant half dozen paragraphs conspicuously lacking specifics left much to the imagination – nothing at all like the level of detail contained in the sections addressing the executives’ benefits. Some retirees found comfort in the opening sentence where Pratt-Miles agreed to honor The Easton Company’s existing plans for a period of time after the merger. Reading a bit further, that comfort was banished by language that bluntly stated, “the continuation of existing benefits are subject to any amendment or termination permitted by law.” So much for honor. Savvy retirees who were careful readers noted this section referred to “employee benefits” – there was no mention at all of retiree benefits. A handful of retirees felt relieved when they read that the new owner would “…provide benefits substantially similar, in aggregate, to benefits provided to similarly situated employees of Pratt-Miles.” Most retirees did not learn that Pratt-Miles had no retiree benefit plans until months after they had cast their votes for the merger.
Pink Slips and Parting Gifts Page 12
