06-20-2016, 12:36 PM
I am pretty convinced Hession's $39M 'change of ownership' bonus played a considerable role in OSH takeover, and I'm hardly the only one. This stuff is also way more common than you might assume. Microsoft has just forked out $26B for LinkedIn, a company that makes a $150M loss per year, and people are struggling to see the synergies (at least we have some with OSH). Why did they do it? Here is the FT:
But if Mr Nadella knows all this, there are also powerful temptations pulling him in the opposite direction. These are the lavish equity incentives that investors have heaped upon his plate. Mr Nadella’s package means he might end up with a stake of between 1.3m and 4m shares over the next five years. What he ends up receiving depends partly on operating factors, but the biggest gearing effect comes if Microsoft’s shareholder returns exceed certain stock market-based targets linked to the S&P 500 index between 2016 and 2021. Hit the jackpot and he could walk away with stock worth more than $200m at the current market price.
In principle, of course, these incentives do not stop Mr Nadella from maximising cash flows from the commercial software business. In practice, however, they strongly motivate him to find some short-term investment story that will encourage investors to put a very high price on Microsoft’s shares. That means diverting some of those cash flows into high-profile acquisitions such as LinkedIn, or investments in exciting but very uncertain ventures such as Microsoft’s “augmented reality” project, HoloLens.
Mr Nadella is not the only tech company boss to yield to this sort of temptation. Take Yahoo, for instance. Under Marissa Mayer, the internet group spent billions on acquisitions and innovations designed to put rockets under its share price. Yet Yahoo would have done better had it cut these costs back and maximised returns from a search engine business that may have been ex-growth but was still generating $4bn in revenues a year.
Investors need to think harder about the messages that incentive packages send to managers. In Microsoft’s case, these seem designed to encourage Mr Nadella to behave as if he’s running an Apple or a Facebook — tech companies that are at the forefront of consumer innovation. In fact, the business he is leading has more in common with HJ Heinz — the owner of a stable of familiar and highly cash-generative staple brands. Finding a way to match the incentive to the task is the next challenge facing investors in a fast maturing tech sector. That may mean getting more bosses to think like Warren Buffett, and rather fewer to approach the task in the manner of a latter-day Steve Jobs.
Perverse incentives lie behind Microsoft’s LinkedIn purchase - FT.com
