What Investment Bankers Should Know about Proxy Statements
Other than financial statements, there’s another document that’s very valuable to investment bankers. This document, called the proxy statement (sometimes known by its formal name, DEF 14A), is a bonanza for anyone looking to learn more about the company.
Learning about the key players in a deal
Real-estate brokers know that the biggest part of doing a real-estate deal is getting to know the people involved. It’s exactly the same when looking to broker deals with companies. Personalities, egos, and relationships play a huge part in just about every deal investment bankers do, including helping along mergers, divestitures, and IPOs.
An excellent place to get started is the proxy statement, which spells out details about the people of power in a company.
A few of the details about people in a deal you can uncover from the proxy include
Biographies of the top management: The CEO, chief financial officer (CFO), and chief operating officer (COO) are the primary points of contact for investment bankers approaching a company. The proxy statement provides complete biographies of these top players. You’ll find details including age, educational background, and tenure at the company.
Clues on relationships the top management has at other companies: Most proxy statements divulge some of the personal contacts of the top management, information that can be extremely valuable for investment bankers who know where to look. For instance, the proxy breaks out all the other companies the executive works with. This is a way to start the networking process.
Details about the board of directors: Some CEOs like to act like they own the place, but that’s usually not the case. Typically, with most large companies, which are largely owned by public shareholders, the management team answers to the board of directors. The proxy spells out who these people are and describes their backgrounds.
Investment bankers pay close attention to the board members who are part of the finance and risk management committees of a company. These subgroups of the board of directors are responsible for overseeing many of the activities that interest investment bankers the most, including decisions to invest in new facilities or divesting assets.
Management team incentives
The biggest reason for diving in to the proxy statement and looking at the way the executives are paid isn’t to get paycheck envy. The reason investment bankers pay such close attention to the way CEOs are paid is to understand what makes them tick, financially.
A deal may make perfect sense based on what the financial statements say, but investment bankers may hit resistance if the deal somehow works against a manager’s personal interests.
For instance, an empirical look at the financial statements may make a great case for divesting a business unit. The business may be a total loser, generating low returns relative to the enormous investments needed to keep the business humming. A sale may bring cash into the company that could be paid as a dividend or plowed into another area of the business that’s more profitable.
But an examination of the CEO’s pay structure may explain why there’s resistance to the deal. For instance, if the CEO’s bonus is based in part on the company’s total revenue hitting a certain size, a divestiture would likely reduce revenue and, in turn, reduce the CEO’s bonus.
There are cases when the company’s management may welcome a deal. It’s pretty typical for the employment contracts of top executives to come with lucrative bonuses when a company is bought out, called golden parachutes. These deals can be worth hundreds of millions of dollars.
Management pay packages
It’s important to understand that the management of companies are hired hands. The CEO and the rest of the management team are employed by the shareholders of the company to run it in the best way to generate returns for the stakeholders. But the CEO isn’t running the company for fun — he expects to get paid for his time and effort.
Before an investment banker even thinks about approaching a CEO to discuss a deal, it’s imperative to understand the size and nature of the CEO’s pay. And that’s very possible using the proxy.
You can spend quite a bit of time analyzing the proxy, looking for all the ways the management is paid. The best way to see, quickly, how much CEOs are paid is to head to the summary compensation table in the proxy statement. The key portions of a manager’s pay breaks down as follows:
Salary: This is the annual base pay received by the executive. Typically, the salary received is a relatively small portion of the total pay package. Due to various tax rules, companies try to keep the salary below $1 million.
Bonuses: Many executives are eligible for added cash payments if they meet certain predetermined performance goals. These bonuses can be quite hefty when executives accomplish the tasks.
Stock awards: Increasingly, more executives are being granted restricted stock, which are special buckets of company stock that are locked until the executives meet certain preset guidelines for performance.
Stock options: Stock options in this context are contracts that give the executives the right to buy company stock at a preset value sometime in the future. Stock options can become extremely lucrative when a company’s stock rises. Stock options have been losing popularity for CEO pay because there’s a concern that they encourage managers to do anything possible to push up the short term stock price.
All other compensation: In this section, the companies spell out all the perks they give CEOs, including the use of the company jet, country club memberships, and private security. These perks, although relatively small in terms of absolute dollars, can be a big deal to executives because they’re some of the sweet part of success.
Total: All the executives’ forms of pay are summed up here and put into the grand total.