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NOVEMBER 1, 2011

Mergers Open 'Golden Parachutes'

Top Executives of Acquired Companies Stand to Get Huge Payouts When They Exit Quickly

By SCOTT THURM

Eugene Isenberg, the former Nabors Industries Ltd. chief executive, isn't the only CEO looking at a gilded exit.

At least three other chief executives are in line for payouts of more than $50 million from "golden parachutes" opened by pending acquisitions, according to a Wall Street Journal analysis of Securities and Exchange Commission filings. Topping the list: Sanjay Jha, CEO of Motorola Mobility Holdings Inc., who could receive $65.7 million as part of Google Inc.'s acquisition of the cellphone maker, according to Motorola's filings.

Four other CEOs could receive exit packages of $30 million or more from deals that are pending or were completed this year. In most cases, the CEOs must leave the acquiring company within one or two years to qualify for the payout.

None of the parachutes is as big as the package that Nabors is paying Mr. Isenberg, its CEO-turned-chairman. But the merger-related parachutes are bigger than most recent severance packages for CEOs being forced out of their jobs.

Leo Apotheker received at least $13 million after he was shown the door at Hewlett-Packard Co. in September. Ousted Yahoo Inc. CEO Carol Bartz received around $10 million. Shareholders have been pushing hard against such "pay-for-failure" arrangements.

Merger-related parachutes typically get less scrutiny, because investors often receive healthy premiums for their shares. Golden parachutes, which guarantee payments to executives who lose their jobs, first appeared in the late 1970s as a tactic by boards trying to ward off hostile takeover attempts. Within a few years the philosophy had flipped. Boards wanted the parachutes as incentives for executives to agree to a takeover, rather than resist an offer for the purposes of holding on to a job.

The clauses are now a common part of executive contracts, providing the equivalent of two to three years of salary and bonus and the elimination of restrictions on the sale of stock options and restricted stock. The payments typically amount to less than 1% of a deal's price.

From the beginning, big parachutes have stoked some public anger. In 1984, Congress tried to limit golden parachutes with a tax on severance payments. The measure largely backfired by encouraging the spread of parachutes, which until then were rare, and by spawning "gross-up" clauses under which companies pay the tax for executives.

The limit applies only to cash severance. These days, though, most of the gold in parachutes comes from provisions allowing executives to immediately sell stock options and restricted stock they might not otherwise have been able to touch for years. Such equity accounted for more than three-fourths of the record $185 million of exit pay for former Gillette Co. CEO James Kilts after Procter & Gamble Co. acquired the company in 2006.

In the Motorola deal, stock and stock options account for more than $52 million of Mr. Jha's potential payout. The CEO is eligible for the shares and other payments if he leaves Google within two years after the deal is completed.

Mr. Jha received most of the shares and options when he was lured to Motorola from Qualcomm Inc. in 2008. Motorola split into two companies earlier this year. The Google deal values Motorola Mobility roughly 50% higher than when it began trading in January.
Motorola Mobility declined to comment.

Last year's Dodd-Frank financial-reform law tried a new tactic to limit parachutes: shareholder pressure. Since April, companies have had to offer investors an advisory vote on exit packages for any deal that requires shareholder approval. About 25 votes have been scheduled so far, according to proxy adviser Institutional Shareholder Services.

No parachute has been voted down, but shareholders at some companies have registered protests. At tech firm Savvis Inc., investors representing nearly one-third of the company's shares opposed golden parachutes opened in July when Savvis was acquired by CenturyLink Inc. for $2.3 billion.

Under that deal, Savvis CEO James Ousley could receive severance payments and equity valued at $28.9 million if he leaves CenturyLink before July 2012, according to a Savvis filing. ISS urged shareholders to oppose the parachutes because Mr. Ousley is eligible for a $4 million gross-up payment.

Mr. Ousley, 65, had been CEO of Savvis since January 2010. The telecom and tech industry veteran had been Savvis's chairman and stepped into the CEO spot after former CEO Philip Koen resigned.

A Savvis spokesman declined to comment.

Many of this year's big payouts stem from energy deals. George Lindemann, CEO of Southern Union Co., could be in line for $53.8 million if the natural-gas pipeline operator is acquired by rival Energy Transfer Equity.

Most of Mr. Lindemann's payout, $32.3 million, would come from accelerated vesting of stock options and restricted stock granted over his 20-year tenure as CEO. He's also eligible for more than $18 million in severance payments and bonuses.

Mr. Lindemann also owns nearly 8.3 million shares of Southern Union, valued at $365 million under the terms of the deal.

The deal initially included a five-year, $50 million consulting agreement for Mr. Lindemann. The companies dropped that contract after shareholders protested. But Energy Transfer's chairman has said he is "hopeful" Mr. Lindemann will agree to a new consulting contract after approval of the deal, expected next year.

A Southern Union spokeswoman declined comment.

The other potential $50 million payout would go to Michel Orsinger, chief executive of Swiss medical-device maker Synthes Inc., which has agreed to be acquired by Johnson & Johnson.

Mr. Orsinger has led Synthes since 2007 and is eligible for $51.9 million if he leaves J&J within two years of the merger's completion. The total includes roughly $10 million in severance payments and $12 million in retention bonuses if he stays at J&J for six months. Mr. Orsinger could also benefit from a $12 million gross-up.

Synthes representatives did not respond to multiple requests for comment.

Write to Scott Thurm at scott.thurm@wsj.com