AAI sale yields no golden chutes

October 14, 2007|By JAY HANCOCK

Ladies and gentlemen, we have a business rarity, a specimen seldom identified outside the imaginations of certain management professors: The Perfect Merger.

Textron's planned buyout of Hunt Valley's AAI Corp. and its United Industrial Corp. umbrella is good for shareholders, employees, customers and vendors at both companies.

Maybe most important, it's not too good for United Industrial's executives.

Textron, maker of Bell helicopters and Cessna planes, is buying United Industrial and its Maryland business of small, pilotless spy planes for $1.1 billion. United Industrial shareholders get $81 per share, six times what the stock sold for in early 2003.

Officials at both companies say that AAI's 1,400 Hunt Valley workers will stay where they are and that they don't expect changes in other parts of United Industrial's work force.

AAI needs Textron's big sales force to get the word out about its product: pilotless, camera-equipped planes that save lives in Afghanistan and Iraq by peering into dangerous places so soldiers don't have to.

Textron needs AAI's planes to increase its military sales and complement its fast-growing businesses of helicopters and small civilian aircraft.

Textron excels at getting the most out of related-but-separate businesses such as AAI. The two companies share many customers, and AAI can help develop Textron's unmanned spy plane, the tilt-rotor Eagle Eye.

Financing

Textron should have no problem selling the $450 million in bonds and commercial paper needed to finance the deal, even at a time of uncertainty over mergers and acquisitions.

The AAI/United Industrial executives will do well, too, but as shareholders, not welfare cases.

Nobody admits it, but many mergers are engineered by bosses driven more by golden parachutes the size of circus tents than by what's good for the company.

Severance packages of $20 million or even $100 million aren't unusual. Why wait a decade to retire when investment bankers can flip your company and send you to Palm Springs tomorrow?

Pay under control

But executive pay at United Industrial and AAI is well under control, and so are the parachutes.

Chief Executive Officer Frederick M. Strader got salary of $491,931 last year, a bonus of $500,000 and some stock options. The two years' salary and other payouts he'll get if he's canned after the merger are reasonable incentives for seeing the deal through - "more on the modest side" of such packages, says New York compensation pro Steven Hall.

There is no lifetime health care coverage for the United Industrial honchos, something parachutes sometimes contain.

And there is no eligibility for a full pension for working only a few years. Strader will make big money all right, but as a holder of stock and options.

Credit to chairman

Credit surely goes to United Industrial Chairman Warren G. Lichtenstein, who is famous for his odd belief that managers work for shareholders, not themselves.

After his hedge fund made a huge investment in United Industrial a few years ago, Lichtenstein accused previous executives of "country-club-like decisions" and worrying more about their jobs than increasing the share price.

Lichtenstein didn't return my call, but you can bet he was all over Strader's management contract, including revisions made the day before the deal was announced. (Strader's severance got bumped from 18 months' pay to two years'.) Lichtenstein isn't just chairman; he's on the board's compensation committee.

Every corporate chairman says shareholders are the boss. Lichtenstein acts like it because he is a shareholder. At $81 a share, the United Industrial stake he controls is worth $162 million.

Reducing jackpots

Three years ago Harvard Business Review asked why "so many companies have made so many acquisitions that have produced so little value."

The answer, the magazine said, was a love of glamorous deal-making and negligence of rigorous research by acquiring executives.

To that I would add: perverse incentives dangled before managers at the companies being bought. Reduce the jackpots and you reduce the chance that bosses will sell for the wrong reason. That increases the chance that the right reason will come along, which, in United Industrial's case, it did.

jay.hancock@baltsun.com

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