Late last month Charter Communications and Time Warner Cable agreed to a merger in a $55 billion deal — closer to $79 billion if you include debt. If the merger goes through, Time Warner’s CEO Robert Marcus will leave the combined company with an exit package worth just over $100 million.
Marcus has been in his current position for a little more than a year. As the CEO of Time Warner, he earns an annual salary of $1.5 million, not including bonuses or additional compensation (as President and COO in 2013, he earned $8.5 million in total compensation, to give you an idea). Yet for the privilege of being laid off after the merger, he’ll rake in a cool $100 million.
There’s something incredibly wrong here… and Marcus is the current poster child of the problem.
Mr. Marcus, a Columbia Law graduate, joined Time Warner after serving as one of its main outside lawyers at a mergers and acquisition firm. He then rose through the ranks, serving as point man on acquisitions before moving into a management role. There is no doubt that he added value to the firm, and thereby brought benefits to shareholders. But is it worth a $100 million exit package? Please.
He’s not alone. Others besides Marcus stand to reap handsome rewards for leaving the company when the merger is complete. Several top people at Time Warner will receive between $18 million and $32 million. Remember, this is not for work, this is to go away. Then there are the myriad of bankers, lawyers, and others who will split a pie of between $100 million and $150 million for advising the two companies.
Just these two categories alone — departing leaders of Time Warner and the team putting the deal together — will take at least a quarter-billion-dollar bite out of the combined value of the two companies. This might seem like a drop in the bucket to a combined company worth around $80 billion. But I can think of lots of people — departing employees who will not get lucrative exit packages and shareholders — who would be happy to get any drops available.
The theory is that such payouts have to be available so that company leaders will pursue strategies that are the best course for the firm, even if they end up costing them their jobs. Without exorbitant golden parachutes worth tens of millions of dollars, executives would steer clear of mergers or other such deals because they want to keep cashing their fat paychecks. Hmmm.
So without a giant exit package to entice them, companies can’t trust their top people to make the best decisions. In any other case, those people would be fired! Instead, companies buy their loyalty for obscenely large amounts of money.
How does that make sense?
There is an oversight group that is supposed to make sure companies are run in the best interest of their owners. The group is called “the board of directors.” They also approve pay packages. The problem is that directors are most often plucked from current and former management of other companies. These people are used to obscenely fat paychecks and golden parachutes, so how can anyone expect objective thought in the room?
But let’s not forget one more important point in all this. The money they’re toying with is other people’s money.
If you own shares of Time Warner Cable, tell Robert Marcus “you’re welcome.” None of this would be possible if there wasn’t so much of “other people’s” money sloshing around the system. This is just another example of how shareholders and savers get taken advantage of in a system pitted against them. Even if we don’t like it, what are shareholders to do? There are precious few places to invest money that have the same liquidity and transparency as equities.
At some level, preparing for retirement forces us to participate in Wall Street’s game. Annuities, bonds, and other streams of income often aren’t enough. Most people need the gains associated with equities if they want to have a decent standard of living in their golden years. And since the Fed has spent six years strangling the fixed income market with exceptionally low rates, equity returns have become that much more important to investors’ portfolios.
But this will change in the coming years, when a market crash sends a shock through the system and interest rates eventually move higher. When this happens, it will give investors the motivation they need to step away from Wall Street’s big casino, at least as far as stocks are concerned. After that, it could be a long time before stocks recover their luster.
That could spell the end of such crazy practices as nine-figure golden parachutes. Maybe some of those funds will find their way back to shareholders — or into the average worker’s paycheck.
Follow me on Twitter @RJHSDent
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