Executive compensation and M&A: Preparing for selloffs

Falling commodity prices, rising production costs, and a risk-averse investment community have led to a decrease in mining mergers and acquisitions so far in 2013. With scarce investment dollars available, many junior mining companies are now in the precarious position of determining if it is possible to survive the current slump.

Under the current circumstances, cash flow shortages are at the top of mind for many junior mining operations that find themselves in a Catch-22 situation. Nearly 60% of the world’s mining companies currently depend on the Toronto Stock Exchange and TSX Venture Exchange to help generate capital to keep their operations running. However, listing on the exchanges comes with a cost which many junior operations are now struggling to cover. 

As a result, many companies are at risk of being delisted which would further cut them off from possible venture funding. As of July 26, the TMX Group had placed 36 companies under a delisting review, 16 of which are mining companies and an additional company is an early stage financing company that operates exclusively in the mining sector.

From these details, there is an “unfortunate/fortunate assumption” that many junior mining operations will be forced to merge, liquidate their assets, or sell themselves off entirely to larger, cash-positive operations. If companies don’t have things right, the results could be problematic or less optimal than they should be.

Executive compensation has become a hot button issue and, if it is not handled correctly, it could potentially derail deals, push away investors, or accidentally force organizations to lose top talent that it considered vital. Boards are now under unprecedented pressure to make sure that they get executive compensation packages right while shareholder activists and institutional shareholder groups have become increasingly vocal about what they will, and will not, accept.

There has been a lot of activity recently in the potash market, but 2010 marked a different type of potential restructuring of the global potash industry. As you may recall, PotashCorp CEO Bill Doyle stood to get $445 million for his company stock and options if BHP Billiton’s hostile takeover bid had succeeded. If he had been terminated after the sale, his change-of-control provisions would have obligated BHP to pay him a further $28 million.

Most recently, the Glencore takeover of Xstrata — originally positioned as a merger — initially included a potential retention payout of £173 million to Xstrata’s top 73 executives. Xstrata’s CEO at the time, Mick Davis, alone stood to make approximately £29 million over a three-year period if the merger went through.

While most corporate sales don’t include CEO compensation packages quite as large as these two examples, it is useful to understand how executive compensation packages can have a significant financial impact on the sale of a corporation. In Doyle’s case, PotashCorp’s investors understood that his potential payout was related to the significant equity he had built up over his tenure within the company and that the BHP purchase would only trigger things that had been in place long before the potential sale.

However, in the case of Davis, the Xstrata board felt that the retention of key senior talent was important and therefore proposed a three-year bonus structure intended to keep its talent in their seats post-merger. Last autumn the majority of Xstrata’s independent investors failed to agree. In the end, the Xstrata board was forced to separate the vote to include the option of approving Glencore’s offer but with or without the retention bonuses. Overall, the message was clearly received when 78.4% of Xstrata’s investors approved the Glencore takeover but without the proposed retention bonuses.

As corporate governance and executive compensation gain increasing shareholder attention, boards should be assured that putting a little extra time into their pre-transaction activities will avoid much aggravation in the future and help to generate maximum returns for investors.

In two follow-up articles, I will address compensation issues that should be considered and dealt with on both the sell and buy sides of any potential transaction.

If you are considering selling your company, you should make sure that you are doing everything you can to keep your senior executives focused and committed through to the end of the transaction; maximize your potential returns; and not financially harm your outgoing executives after they’ve achieved whatever it is that’s been asked of them.

Alternatively, if you are looking for valuable additions to your existing operations or holdings, you need to make sure that you fully understand how employment agreements will be affected by your purchase; liabilities that you may be unintentionally acquiring; and predetermine how executive equity will be dealt with.

With the current market situation pointing to a possible increase in M&A activity and executive compensation having attained such high-visibility, a little bit of work upfront should enable companies and investors to get the most out of their efforts. 

— Brad Kelly is a Partner at Global Governance Advisors, an independent board advisory firm with offices in Toronto, Calgary, New York and Miami. He specializes in performance goal setting and the strategic review, valuation and innovative design of executive compensation and corporate governance programs. He can be reached at (416) 707-4614 or brad.kelly@ggovernanceadvisors.com. Follow Brad on Twitter @BradKellyGGA. For more information visit http://ggovernanceadvisors.com