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Here's a lesson for young CEO wannabes looking for negotiating tips: When you agree to become a chief executive officer of, say, a local phone company, make sure that your contract has a clause in it that ensures that if you lose your job through a merger, your landing will be softened by a $100 million "golden parachute." At the worst, you'll glide into your unexpected retirement a rich man. Even better, however, is that if the new company wants to keep your services, it knows that it will have to pay you more than that.
This tutorial has been brought to you courtesy of US West CEO Sol Trujillo.
The $45 billion mega-merger announced by US West and Qwest last summer seems almost certain to be completed sometime this year. This past November, shareholders of both Denver-based companies gave their thumbs-up to the merger, and state and federal government regulatory agencies have already indicated that they, too, are leaning toward approval.
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In the meantime, officers for both telecommunications corporations have spent considerable time pointing out the advantages of creating one behemoth business.
Qwest CEO Joseph Nacchio promised that the new company, to be called Qwest Communications International Inc., will be "an internet communications powerhouse." In a November 2 address to shareholders, Trujillo added, "I can say with confidence that US West and Qwest will be able to deliver services that will not only meet customer needs, they will anticipate them."
One advantage that Qwest and US West's officers have not pointed out, however, is how the deal will plump their wallets beyond imagining.
When last we checked in, documents filed last spring with the Securities and Exchange Commission indicated that US West's board of directors had given Trujillo a "change of control" package worth close to $100 million ("Caller Rewards Program," August 12, 1999). The provision, buried in Trujillo's contract, called for him to receive the massive payday if he were to quit, be fired or even suffer a change in job description in the event of a merger. The parting gift came in the form of bonuses, cash payouts and accelerated and new stock options.
Naturally, with such a financially rewarding incentive to leave the US West/Qwest marriage, Trujillo would need quite an offer to stick around to help run the new company (a task he will reportedly split with Nacchio and Qwest chairman of the board Philip Anschutz). According to a September 17, 1999, SEC filing, the phone company's board of directors made that offer on August 6.
The four-year deal is called a "retention agreement." As the company explained in the filing, "The purpose for such retention awards and grants is to provide additional incentives to individuals who are critical to the business both in terms of completing the merger and beyond, and who are likely targets for competitive offers from other companies...Given the demand for senior executives in the telecommunications industry, the Human Resources Committee approved and the US West board ratified the terms of a retention agreement with Mr. Trujillo."
Trujillo's side of the bargain is simple. He will run the new company for at least four years. If he leaves Qwest Communications International, he agrees not to work for any company that competes with the new telecommunications giant for a period of eighteen months. Also, should he leave, he promises not to "solicit or entice away any employee, sales representative or customer from US West."
All he gets in exchange for the sacrifice is more than $250 million.
The deal, which will be in effect through the summer of 2003, compensates Trujillo primarily in the form of a series of stock options. Typically, stock options give an executive the opportunity to purchase company stock at a very low price and then sell it back to the company at its current market value.
The first part of Trujillo's deal gives the CEO the opportunity to purchase one million shares of US West, 250,000 shares at a time, over the next four years. As of late last week, the company's stock was trading at about $70 a share, making that segment of Trujillo's retention package worth $70 million. (A purchase price was not mentioned in the SEC filing, but presumably Trujillo will have to pay some money for the shares, thus diminishing his net pay somewhat.)
The second part of the package doubles the first. According to the agreement, on January 3, 2000, Trujillo was to have received an additional two million stock options. Again, he will acquire the stock over a period of four years, 500,000 options at a time. Two million times a $70-per-share price equals $140 million.
After that, additional provisions of the retention deal fall into the chump-change category. For example, Trujillo stands to earn another 300,000 shares of company stock ($21 million) in three installments after the merger is completed. Thoughtfully, US West has also agreed to cover any tax consequences Trujillo may incur for enduring such a large payday.
Finally, in celebration of the successful merger, when it occurs US West has agreed to honor any and all outstanding stock options that are held by officers but are not scheduled to become fully vested until a later date. According to figures included in the latest SEC filing, these will be worth another $17.75 million to Trujillo. Thus Trujillo is presented with a challenging dilemma: Should he leave Qwest Communications International with only $100 million and not have to work for a living? Or should he stay and toil for a quarter-billion dollars?
Alas, it's unfair to single out Trujillo as the only person profiting from the telecommunications merger. According to the SEC filings, the services of other US West executives were considered too valuable to lose, so they, too, were given retention agreeements as well. These will be handed out in the form of cash awards and stock options.
Executive Vice President for Operations and Technology Greg Winn, for instance, stands to score about $30 million for not jumping ship when US West mutates into Qwest Communications International. This prize will arrive in the form of stock options (350,000 of them), cash (a $3.9 million "retention cash award") and the value of stock options that will become vested on the date of the merger (about $6.5 million). Chief Financial Officer Allan Spies is looking at a $20 million merger payday -- about the same figure that Executive Vice President for Marketing Mark Roellig should see.
Don't cry for Qwest CEO Nacchio, either. According to his retention deal, also filed with the SEC this past fall, the merger of his company and U.S. West entitles him to nine million shares of Qwest. With a guaranteed purchase price of $28 and the stock trading at about $45 as of last week, that's a $153 million payday.
And that's not all. According to the SEC filing, "In connection with the merger, and in recognition of the additional duties and responsibilities incumbent upon Mr. Nacchio in connection with effectuation of the merger and his anticipated role in the management of the combined company, Qwest and Mr. Nacchio have entered into certain modifications to the terms of his employment."
One such modification calls for the CEO to get a 47 percent base salary increase, from $680,000 to $1,000,000. That figure will also be helpful when it comes time to calculate Nacchio's annual target bonus, which the new deal increases to 150 percent of his salary, rather than the previous 110 percent. For anyone still counting, that's another potential $1.5 million. As a final contract modification, Qwest's board of directors agreed to make a "growth share" payment to Nacchio on January 1, 2001. That check will be worth just under $25.5 million.