Why It’s Important to Calculate Your Change-In-Control Payouts Now

iStock_000019351044XSmall.jpgBusiness planning is a key bank responsibility, but many institutions fail to adequately address a critical element of planning:  clarifying and understanding the impact of severance and change-in-control benefits in the event of a potential future transaction.  

Deal offers are often unexpected or need to be quickly evaluated. Negotiations go much more smoothly if the bank has already defined and detailed its change-in-control (CIC) terms and fully considered their potential impact on the executive team.  Why? 

Consider this scenario.  Let’s say the bank’s board and management have agreed on fairly standard and, they believed, fair CIC severance packages:  two times base salary + bonus along with equity acceleration and benefits continuation.  In the process of setting terms, however, the bank made what is actually a common error: It failed to consider the potentially significant impact of the golden parachute excise tax.  

When the bank did the tax calculations, it discovered executives would be subject to an excise tax that would reduce their net severance payout by more than half. Only when the deal became real did it become clear that the benefit structure and ultimate payout would be significantly different than what was intended.   

This unplanned outcome forces two negotiations.  First, the target’s management and board will try to resolve the difference between the intended and the actual value.  But with an offer already on the table, there will need to be a second negotiation with the buyer to get agreement on any changes to the terms.  As a result, the target and the buyer are distracted from the primary objective, which is to evaluate and approve a deal that will create value for both banks’ shareholders.

I will be discussing this and other topics impacting mergers and acquisitions at the Bank Director Acquire or Be Acquired conference in Scottsdale, Arizona, Jan. 27 to Jan 29, including the following: 

  • What are banks doing about CIC benefits?
  • What are some of the “hidden” negative consequences?
  • What can banks do to help mitigate these unintended consequences?