Big Paydays in a Merger

November 7, 2011

Thomas May, left, Nstar's chief, and Charles Shivery of Northeast Utilities. Josh Reynolds/Associated Press

When is a merger of equals really a takeover? One easy way to tell is when the top brass get rich and undeserved paydays. There’s probably no better live example than the just-delayed sale of a Massachusetts electric utility, Nstar. Its top five executives could feast on as much as $50 million in severance and change-of-control payments despite labeling their deal one of mutual control for both sets of shareholders. As regulators investigate the union more deeply, investors may want to do the same.

It’s no surprise Nstar wanted to describe selling out to a rival, Northeast Utilities — the company behind Connecticut’s recent crippling power outages — as a merger instead of a takeover. Given their huge local monopolies, electric companies are highly regulated and politicized creatures. Nstar has 1.4 million captive customers in the greater Boston area.

These concerns explain why the companies used a variation on the verb “merge” 29 times when announcing the all-stock deal. Each company will contribute seven directors to the board. Nstar’s chief executive, Thomas J. May, retains the same role in the combined company, while his counterpart at Northeast, Charles Shivery, will become chairman.

But while all this makes it sound like a merger, it’s not. The terms of the transaction give Nstar’s existing owners shares equal to around 44 percent of the new entity. That constitutes a change of control, according to Nstar’s proxy documents, thereby causing accelerated payouts of unvested equity and other benefits for named executive officers.

For May alone, this comes to $8.3 million. What’s more, the deal includes so-called double-trigger agreements that pay out as much as $50 million if the five senior employees are terminated after two years. In the context of executive pay gone wild, this may not sound like an aberration. The oil driller Nabors recently paid $100 million in severance to its chairman, Eugene Isenberg, merely to surrender the title of chief executive.

But equity investors normally receive a premium when handing control to a buyer. Nstar’s deal was struck at parity. That effectively means Nstar’s executives will exploit a change-of-control premium that their shareholders were denied.

For more independent financial commentary and analysis, visit www.breakingviews.com.

A version of this article appeared in print on November 8, 2011, on page B2 of the New York edition with the headline: Big Paydays In a Merger.