July 5 is the day when Bank of Montreal's U.S. footprint expands dramatically, as it closes on its purchase of Milwaukee's Marshall & Ilsley Corp. It is also the day, less illustriously, when BMO's actions make M&I's executive squad rich. Seventeen of the bank's officers are entitled to cash and stock of nearly $90-million (U.S.) after the deal closes, depending on whether they stay with BMO.
The point here is not to criticize M&I for its generous severance plan - which we will do, anyway - but also to offer a cautionary tale for Canadian investors. It's all well and good to be proud when Canada's pillars of industry are strong enough to make transformational acquisitions south of the border. One of the unfortunate byproducts of such deals, however, is the cost of signing off on U.S.-style severance payments that are generous by Canadian standards.
Actually, to be fair, the M&I plan is generous even by American standards. When companies craft what are called change-in-control payments, they have to decide two key things: An amount of compensation that represents the executive's annual pay, and then the multiple of that annual figure to be paid out when the executives lose their jobs.
In both cases, M&I has made choices that maximized the payout. While many severance plans use an executive's salary and some calculation of previous annual bonuses in the calculation, M&I also adds in an estimate of the current year's bonus, plus the value of retirement benefits, car allowance and country club dues.
And for five of the 17 executives, including chief executive officer Mark Furlong, M&I multiplies the annual compensation figure by three when arriving at the payout. (A multiple of two, as M&I uses for the less-senior officers in this bunch, is common at companies that take a more conservative approach to their severance packages.)
The result of the plan's configuration is an $18-million cash payout for Mr. Furlong, potential payments of $4.1-million to $5.5-million apiece for four other top executives, and $26.7-million combined for the remaining 12 officers. (Most of the executives - but not Mr. Furlong - get their money only if they leave M&I after the deal closes.)
The group of 17 also get immediate possession of restricted stock that was supposed to vest over time with their continued service to the bank; M&I estimated its value at $24-million. (The bank did not respond to a request for comment last week sent through its investor relations department.)
These types of payouts are common under the aegis of rewarding executives for a job well done. M&I, however, was a troubled bank that traded at $50 a share in March, 2007, before requiring $1.7-billion in U.S. government TARP funds (the impolite call it a "bailout") before BMO stepped in and agreed to buy the bank for a little under $8 a share.
High By Any Standards
Indeed, the severance payments were too much even for many hardened U.S. capitalists. The Milwaukee Business Journal said in February that "many members of metropolitan Milwaukee's financial community reacted with uncharacteristic outrage" at the payments, citing the bank's need for the government money.
Crain's Chicago Business, not a bastion of leftist thought, editorialized that "showering tens of millions in shareholder dollars on the CEO of an underperforming bank perpetuates the warped incentive systems that helped trigger the financial meltdown of 2007. It rewards bad decision-making, destroys shareholder value and undermines confidence in financial markets."
Now, to be fair to BMO, the contractual arrangements between M&I and the executives were put in place in 2008, well before BMO came on the scene, and were triggered by BMO's buyout offer. This is the point made by BMO spokesman Ralph Marranca, who said the bank would have no further comment.
Which means BMO chose not to address another issue: Why it chose to promise Mr. Furlong an additional $6-million if he completes his first year as CEO of BMO's U.S. banking operations.
Whatever the motivation, the fact remains that a $50-billion bank - less than one-eight the size of BMO - crafted a severance plan that easily exceeds Canadian custom.
At BMO, for example, the company owes CEO William Downe just $6.4-million (Canadian) in the event of a change in control, with just two other top executives eligible for any payment at all. All that hubbub last month over the cost of the CEO switcheroo at Tim Hortons centred on just $6.5-million in severance.
As the M&I situation illustrates, just as the opportunities are bigger in the U.S., so are the paycheques. Canadian investors who want to see their champions do a little cross-border shopping need to be aware of these large hidden costs.
Special to The Globe and Mail
David Milstead