Rouse Co. sale is a big payday - for shareholders and for CEO

August 22, 2004|By JAY HANCOCK

THERE ARE MANY plausible reasons to cobble up a shopping mall colossus by selling the Rouse Co. to General Growth Properties - a $12.6 billion deal (cash plus debt assumption) that was announced Friday.

Here's one, as described by Rouse Chairman and Chief Executive Officer Anthony Deering the day the buyout was announced: "The combination of our premier retail properties with those of General Growth will create the most powerful portfolio of retail assets in the United States."

Here's another, which Deering didn't mention: He stands to pocket at least $80 million from the transaction, by my conservative calculation. By selling one of Maryland's historic companies to a Chicago-based outfit, he gets perhaps the biggest payday ever for a Maryland executive.

Which is the real reason for doing the deal? Well, even if it doesn't make business sense to combine the two companies, $80 million is powerful incentive to get it done anyway.

Deering's emoluments, while enormous, aren't unusual, even in these days of corporate governance "reform."

Combinations of stock options, stock grants, severance plans and other goodies triggered by buyouts make selling a company an automatic way for almost any big-firm CEO to get very rich or richer, very quickly.

Norman P. Blake Jr. became one of Baltimore's least-loved former executives in 1998 when he reaped $44 million by selling USF&G Corp. to St. Paul Cos. for $3.5 billion. The deal eventually wiped out about 2,000 Baltimore-area jobs.

I haven't run the numbers lately, but Constellation Energy Group boss Mayo Shattuck also will do fabulously well when (if?) he sells the parent of Baltimore Gas and Electric Co. to some larger utility.

As of March, Deering directly owned 395,089 Rouse shares, many of which were granted as part of his compensation in years past. A partnership including family members owned another 33,632 shares. Together, those two chunks of stock will be worth $28.9 million at Friday's announced buyout price of $67.50 a share.

But that's only the beginning.

Deering was granted 970,983 stock options last year. With exercise prices ranging from $32.20 to $45.85, all are well below the $67.50 per share sales price and "in the money," as they say. Together, they'll net him $29 million if the deal goes through.

In the money, indeed.

But Deering held some 600,000 other options at the end of last year that I was unable to value precisely. Disclosure requirements for executive pay still need improving, and a Rouse spokesman declined to talk about Deering's financial stake last week.

But the other options would probably be worth at least $15 million. And Deering is to get at least $1 million or so in severance, plus 105,000 more shares of stock over the next three years, for another $7 million.

What, you say? There won't be a Rouse Co. in three years? He still gets the money?

Yes. That's the beauty. Under the employment contracts of Deering and most other public-company chief executives, all future compensation is triggered immediately by a "change in control," including a buyout. Unvested stock options become vested. Restricted stock becomes unrestricted. Other future benefits come tumbling down in a big pile of lucre.

Boards of directors talk about building for the future and "long-term incentive plans" for executives. But for the CEO who can peddle his company, the long term is now. Christmas comes in August.

My estimate of an $80 million payday for Deering is conservative because it doesn't include numerous items often included in golden parachutes.

He might get an amount related to accrued annual bonuses. He's due $1.3 million or so in annual pension benefits (which would be further "enhanced" by the buyout) after he retires; if that's paid in a lump sum it would add many millions more. And Rouse has agreed to pay what will probably be very large excise taxes triggered by Deering's parachute. That also should be factored in.

The rationale for such huge payouts is to make managers less likely to resist buyouts that immediately benefit shareholders, which this one does. If CEOs don't have to worry that a buyout will hurt them financially, the theory goes, the incentive to keep a company as their private sandbox will go away.

That's probably true, but now the incentives seem tipped too far the other way.

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