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Archive for November, 2009

By Ronald C. Coelyn – Founding Principal of The Coelyn Group and Gerbsman Partners Board of Intellectual Capital Member.

Earlier this week I read an article in “Agenda,” a publication specifically for Corporate Directors of public companies, called “What’s in Store for 2010 Compensation” written by Josh Martin that I thought might be particularly helpful as executive management turns it thoughts to the upcoming year. The article follows:

Compensation committees at leading corporations are taking a tough stance on executive pay packages, reflecting uncertainty over the economic recovery and concerns that large pay increases could prompt more government regulation as well as shareholder anger.

According to the results of Agenda’s “Directors and Officers Outlook: Q4” survey, 55.7% of independent directors expect to see either no changes in CEO total direct compensation or compensation increases of less than 5% in 2010.  However, there are signs of optimism: More than 66.5% do expect some kind of compensation increase to be approved. (Total direct compensation includes base salary plus annual incentives plus long- term incentive present value, based on value at date of award.)

The low rates of increase reflect the slowness with which the U.S. is moving out of the recession. “Compensation packages reflect the state of the economy,” says R. Charles Moyer, a director on the board of King Pharmaceuticals. “It’s tough to argue for pay increases amid layoffs. Most sensible managers understand this.”

Some directors, especially in industries under scrutiny, point out that the reluctance to give larger pay increases is driven by the new political landscape in which companies operate. “If we gave large raises, regulators would not look on it favorably,” says Lowell Hare, an independent director serving on both the audit and compensation committees at First State Bancorporation.

But there are a number of executives who expect to be rewarded for enabling their company to successfully weather the recession.

A recent poll of 150 CEOs conducted by the ExpertCEO blog site shows that, as a group, they anticipate a bounce of nearly 7% in 2010 total compensation above 2009 levels. The largest increases in CEO pay are expected in the technology sector, where top management is anticipating an 8% growth in total compensation. This is roughly double the average rate of increase forecast by the 131 independent directors participating in the Agenda survey.

The gap between managements’ and boards’ expectations could create some conflict as 2010 pay packages are being finalized. However, boards have a distinct advantage in designing compensation plans that hold the line on increases: In a weak economy, management arguments that pay increases must be given to retain talent carry far less weight.

“You have to be willing to let someone go if you can’t satisfy their pay expectations,” says Paul Rowsey, a director on the board of Ensco International.

Rowsey adds that directors will be “much more deliberative and analytical in reviewing 2010 compensation packages. “They’re doing more research,” he says. “And they’re requiring consultants to do more, too.”

A Checklist for 2010

Consultants themselves are developing proactive strategies to meet the challenges of designing the 2010 executive compensation packages. Mercer, for example, developed a “10 for 2010” list of key actions compensation committees can use to effectively improve the pay packages. These points include:

Reexamine total rewards strategies to ensure their alignment with business strategy.

Make pay for performance meaningful, incorporating new performance measures as needed, to further align performance with business strategy.
Rethink the mix of compensation vehicles, in particular to ensure a balance between pay vehicles, performance time horizons and risk.
Carefully review any compensation actions made during the economic downturn in 2008-2009 to determine which remain relevant and should stay in effect for 2010.

The LTI Factor

Much attention will be paid to the largest area of executive compensation: long-term incentives.
“The current economic climate has made all boards and comp committees rethink all factors that determine incentive pay,” says Hare. “You’re not going to see significant pay increases until [management] stabilize their companies and the general economy strengthens.”

In the face of mounting pressure from management as the economic recovery continues, boards are looking to adjust LTI packages.

Some directors question the growing use within LTI of new pay vehicles, such as performance shares, in lieu of options or restricted shares. “Performance shares do have a place [in LTI packages],” says Moyer. “But there’s nothing you can’t do with other instruments.”

Nevertheless, Rowsey notes that LTI will likely emerge as the area where differences in board- designed pay packages and management’s expectations are reconciled. “Boards will offer performance-based LTI,” he says, adding a caveat: “There will need to be more validation over time for any such increases.”

Tightness Across the Board

The same approach applied to LTI is being developed for bonuses. “We have flexibility to reward outstanding work or give less to those who underperform,” says a CEO who is also a board member. But he adds, “In the current economic environment, even if an executive outperforms, getting a salary increase is not a slam dunk.”

“There’s always difficulty in structuring short-term and long-term incentives,” says Moyer. “There’s no magic formula.”

Directors know they face a unique challenge as they design executive compensation packages for 2010. They need to decide whether to restore last year’s cuts and changes to their compensation programs or carve a new path going forward. In some ways, there is little choice: Activist legislation, regulation recently put in place and an uncertain economy make any “business as usual” approach untenable.

Warmest regards,

Ronald H. Coelyn


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As AOL prepares to spin off from Time Warner in an IPO, it wants to gussy itself up so that it looks as appealing as possible tp ublic investors. Today, AOL disclosed that it plans yet another restructuring which could cost as much as $200 million. The biggest cost savings from any restructuring is usually through layoffs, and the latest round has already started at AOL, with 100 let go this week and as many as 1,000 of its 6,000 jobs at risk of being eliminated.

Despite new leadership under CEO Tim Armstrong, AOL has yet to turn around financially.  Last quarter, revenues sank 23 percent to $777 million.  The biggest drop came from subscription revenues to its legacy Internet access business, down 29 percent, but advertising revenues also took a hit, down 18 percent.  AOL depends on display advertising, which has not yet rebounded like search advertising appears to be doing.

By cleaning up house and removing as many costs as possible before the IPO, Armstrong is trying to make AOL as lean as possible. But eliminating salaries and benefits can only go so far. He has to show that his new content strategy can create actual growth as well.

Article @TechCrunch

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Oracle, Dell, Xerox and now HP – the high tech world as we knew it is changing fast. Companies that previously stood their ground and was seen as pillars of innovation are know swallowed into mega-companies that will challenge the marketplace with new services, products and offerings. Here is some selected tidbits from BusinessWeek in regards to the deal.

“Through its acquisition of networking gear maker 3Com, Hewlett-Packard will accelerate competition with Cisco Systems (CSCO), especially in China, practically overnight. Then comes the hard part. To make the most of the $2.7 billion deal, HP also needs to revitalize 3Com’s faded brand and persuade Western companies to take a chance on its products, designed largely in Asia.

Analysts were quick to see the logic in the planned acquisition, announced on Nov. 11. HP (HPQ) is attacking Cisco’s dominance of the market for gear that connects computers just as Cisco moves more aggressively into the market for computer systems, where HP is strong. Cisco on Nov. 3 struck a partnership with storage company EMC (EMC) and software company VMware (VMW) aimed atsupplying bundles of computers, storage, networking, and software.”

The article continues…

“HP’s bigger challenge in making the deal a success will be removing the tarnish that remains on the 3Com ‘s brand in the U.S. and Europe as a result of years of mismanagement. While 3Com’s data-center networking gear has about 35% of the Chinese market, it’s practically absent from the largest companies in the U.S. and Europe, analysts say.”

Read the full article here.

Other good resources for this topic include: Barrons, WSJ, 24/7 Wall St., Mashable & Techcrunch.

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Veterans Day – 2009 – “Freedom is not FREE”

On this Veterans Day- please say “thank you” to a veteran and stop an active duty soldier and say “thank you for your service”.

Also, please support American Legion Post 911 “Serving Generations of Heroes” and more specifically returning Iraq and Afghanistan Veterans.

http://www.legionpost911.org/alp911/home.html

May God Bless and Protect our service men and woman in harms way and give them the courage and support in performing their duty.

Freedom is NOT FREE – and we must never, ever, ever forget that.

Please salute these soldiers and their commitment to duty, honor and country.

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Here is some news from OpenMarket.org.

“Unemployment is now higher in the U.S. than in Europe,  reports the Washington Post.  “The official U.S. unemployment rate, reported last Friday, now stands at 10.2 percent,” compared to “9.7 percent” in Europe.   This is the highest rate inmore than 26 years, and marks a huge change from the recent past, in which unemployment was double the American rate in much of Europe.

Unemployment is at 10 percent in France, whichrefused to adopt a U.S.-style stimulus package, and only 7.6 percent in Germany, which adopted a stimulus package that was smaller relative to its economy than ours was.  (Countries that refusedto adopt big stimulus packages have fared better than those that imitated President Obama. And the biggest-spending countries have suffered worst in the recession.)

A “broader measure of U.S. unemployment,” including discouraged workers, puts U.S. unemployment at 17.5 percent, reports the New York Times.

As the Post notes, “For many on the left, the lament for years has been: Why can’t America be more like Europe? Why can’t rustic Americans be more like sophisticated Europeans? The sentiment has resurfaced in recent months as the health-care debate has raged on — why can’t the American health-care system be more like Europe’s?”

Well, America is now more like Europe when it comes to unemployment.  But not when it comes to social benefits and protections.  The American Left knows how to import Europe’s failures, but not its successes.

The massive health-care bill passed by the House on Saturday is a classic example.  It would expand health care coverage somewhat, but not to European levels, and it would vastly increase the costs of our health care system, rather than reducing it to European levels.   It would also increase taxes to “European levels of taxation.”  The health care bill contains politically-correct provisions that Europeans would never put up with, like pork for trial lawyers and racial preferences.  And restrictions on national competition in health insurance, which do not exist in Europe.”

Read the full article here.

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We all know that mergers are not easy. Here is some news in regards to the Oracle/ Sun merger from Daily Finance.

“As expected, the E.U. raised objections to the Oracle (ORCL) buyout of Sun (JAVA) at about the same time that the Department of Justice approved the deal. The E.U.’s objection is based on the large market share that the two tech companies would have in the MySQL software business.

European authorities have been deviling American companies for years. In 2001 they killed the GE (GE) deal to purchase Honeywell (HON), which would have been the crowning achievement of Jack Welch’s tenure at the world’s largest conglomerate. The E.U. has troubled Microsoft (MSFT) and Intel (INTC) over antitrust concerns, and now it has brought up similar issues with Oracle’s plans.

The aggressive stance of the Europeans could threaten other deals in the works, starting with the planned joint venture in the search industry betweenYahoo! (YHOO) and Microsoft. Action on the merger could bring Google’s (GOOG) huge market share in the search industry under scrutiny. Even the Kraft (KFT) deal with Cadbury might be aggressively reviewed — if it ever happens. That transaction would give Kraft a huge portion of the gum and chocolate businesses in Europe.”

Read the full article here.

 

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Gerbsman Partners has been involved with numerous national and international equity sponsors, senior/junior lenders, investment banks and equipment lessors in the restructuring or termination of various Balance Sheet issues for their portfolio companies. These companies were not necessarily in Crisis, had CASH (in some cases significant CASH) and/or investor groups that were about to provide additional funding. In order stabilize their go forward plan and maximize CASH resources for future growth, there was a specific need to address the Balance Sheet and Contingent Liability issues as soon as possible.

Some of the areas in which Gerbsman Partners has assisted these companies have been in the termination, restructuring and/or reduction of:

  • Prohibitive executory real estate leases, computer and hardware related leases and senior sub-debt obligations – Gerbsman Partners was the “Innovator” in creating strategies to terminate or restructure prohibitive real estate leases, computer and hardware related leases and senior and sub-debt obligations. To date, Gerbsman Partners has terminated or restructured over $790 million of such obligations. These 77 deals were a mixture of both public and private companies, and allowed the restructured company to return to a path of financial viability.
  • Accounts Trade payable obligations – Companies in a crisis, turnaround or restructuring situation typically have accounts and trade payable obligations that become prohibitive for the viability of the company on a go forward basis. Gerbsman Partners has successfully negotiated mutually beneficial restructurings that allowed all parties to maximize enterprise value based on the reality and practicality of the situation.

Date Certain M&A Process

Gerbsman Partners developed its proprietary “Date Certain M&A Process” in 2002. Since that time, the process has evolved into a 6 week plus time frame vehicle for maximizing enterprise and asset value for under-performing venture capital and senior lender backed medical device, life science and technology Intellectual Property based companies. To date, Gerbsman Partners has maximized enterprise and asset value for 60 portfolio companies. A description of this proven process can be reviewed on the Gerbsman Partners website.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. Since 2001, Gerbsman Partners has been involved in maximizing value for 60 Technology, Life Science and Medical Device companies and their Intellectual Property and has restructured/terminated over $790 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception in 1980, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in Boston, New York, Washington, DC, Alexandria, VA, San Francisco, Europe and Israel.

For additional information please visit Gerbsman Partners website.

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