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Merged Utility Companies' "Common Strategic Vision For The Future" Lasts Five Days

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It can't be a coincidence that perhaps the greatest 8-K ever filed was filed at 5:07pm on July 3:

In connection with the Merger described in Item 2.01 of this Current Report on Form 8-K and pursuant to the terms of the Merger Agreement, effective as of the effective time of the Merger, William D. Johnson, the former Chairman, President and Chief Executive Officer of Progress Energy, was appointed as the President and Chief Executive Officer of Duke Energy.

Mr. Johnson, age 58, was Chairman, President and Chief Executive Officer of Progress Energy, from October 2007 through July 2, 2012. ... Mr. Johnson previously served as President and Chief Operating Officer of Progress Energy, from January 2005 to October 2007.

Mr. Johnson subsequently resigned as the President and Chief Executive Officer of Duke Energy. See disclosure below under the heading “Resignation of Mr. Johnson and Reappointment of Mr. Rogers.”

I have no way of researching this but I'll go out on a limb and say it's unlikely that any company has ever previously announced the hiring and firing of a CEO within three paragraphs of each other in the same 8-K, with an employment agreement dated June 27 and a separation agreement dated July 2. This is not, of course, just a case of hiring a young whippersnapper who seemed full of potential and then finding him injecting heroin in the executive bathroom on his first day on the job; there seems to be some more Machiavellian maneuvering going on. Duke and Progress completed a stock-for-stock merger this week, forming the new Duke Energy; the deal gave Duke shareholders 63% of the combined company and 11 of the 18 new directors, including the executive chairman, while Progress's CEO was set to be president and CEO of the combined company. Which, and expect to hear this argued in all seriousness in court: he totally was for five days! The Journal has more:

In the past week, the deal, which created a utility serving more than seven million customers in the Southeast and Midwest, cleared its last hurdles. Papers filed Monday in Delaware made it official. The new board—about two-thirds of which was made up by premerger Duke directors—had its first meeting Monday afternoon, the people familiar with the matter said. ...

While the meeting was the first time the board discussed the CEO issue, it had become clear to some over the months leading to the deal's close that the original arrangement wouldn't work, a person familiar with the matter said. "Different personalities, different cultures," the person said. ...

Mr. Johnson was surprised by the outcome and had very little time to consider the terms of his exit package, one person familiar with the matter said. The Duke spokesman said he believed Mr. Johnson had rented a house in Charlotte but never actually moved in.

Inconvenient for him, though he got an extra $1.5mm severance payment for his five days of work, plus relocation expenses, so don't feel too bad for him. Feel ... worse for the Progress directors? I guess? Here is one of them:

"This was a critical element in the merger deliberations of our Board," John Mullin, former lead director of Progress, said in [a] letter. "I do not believe that a single director of Progress would have voted for this transaction as structured with the knowledge that the CEO of Duke, Jim Rogers, would remain as the CEO of the combined company."

Duke has said Mr. Johnson left by mutual agreement with the board.

In an interview Friday, Mr. Mullin accused former Duke directors who dominate the newly merged board of reneging on their commitment to make Mr. Johnson CEO of the combined enterprise.

You can read the Progress directors' stated reasons for approving the merger here; one really is:

The Progress Energy board of directors considered that Progress Energy and Duke Energy share a common strategic vision for the future of the combined company as a United States focused multi-regional regulated electric utility with related non-utility activities. The Progress Energy board of directors believes that the governance arrangements for the combined company provided for in the merger agreement will increase the likelihood of effective implementation of this strategic vision. These governance arrangements include: Mr. Johnson will be the president and chief executive officer of the combined company. ... The senior management team named in the merger agreement draws from the senior management teams of both companies.

There are other reasons, like the premium offered to Progress shareholders and the fact that the merger offered financial benefits; Progress's stock was up 40% between the merger announcement and closing so perhaps the shareholders were convinced of those benefits. But perhaps they were relying on Johson being in charge of the combined company to get those benefits? New Duke stock is down since closing, and S&P is unimpressed by the quickie management change, so you could I guess believe that.

Cultural and management issues are important and hotly negotiated in M&A deals, and the fact that Duke and Progress talked up their going-forward management team in their pitch to investors makes it awkward that they scrapped those plans the second the deal closed. If you're a Johnson fan, you could get mad about that, and take seriously the complaints of Progress directors about how important it was to them - in their role as representatives of Progress shareholders - to have their man in charge. Or you could just guess that most investors buy utility stocks for stable dividends and economic appreciation and not because they're devoted fans of the CEO. That is also possible.

In any case it's hard to see what the aggrieved directors (and shareholders?) will do about it, besides complain. Johnson's position as CEO of the combined company, and the seamless integration of two management cultures that four days in are showing some seams, were pitched to shareholders as a good thing for them and a reason for them to vote for the deal. But the merger contracts didn't, and really couldn't, protect whatever interest shareholders (and directors) might have had in keeping Johnson on as CEO. If Duke's directors wanted to fire Johnson the second after the deal closed, the merger agreement didn't stand in their way. All that stood in their way was his employment contract, which was solely for his benefit: they coudl fire him as long as they gave him some $45 million to take off. And they did. Hard to see what the shareholders get from that, but it works out fine for him.

Behind Duke's CEO-for-a-Day [WSJ]
Former Progress Director Calls Duke CEO Switch 'Incredible Act of Bad Faith'
Duke Energy Corp. Form 8-K [EDGAR]


One More Thing For Governance Day

Felix Salmon put up a great note from a reader about investment banking conflicts; it's fantastic so go read it. But this is a tiny bit unfair: You and many other commentators seem to have some misconceptions about what exactly large, sophisticated clients such as El Paso’s board hire investment bankers to do. Its always funny how, in the minds of pundits everywhere, those conniving and all-powerful one-percenters who sit on corporate boards become impotent and completely incapable of independent decision-making once an investment banker walks into the room. The basic argument is that repeat-player investment bankers provide value not by telling brainless executives whether to accept or reject a merger, but by providing intelligent decisionmakers with access and relationships, and relationships come with conflicts. As he says: When sophisticated clients (management teams, company boards, PE funds, etc) hire M&A bankers, they typically hire them for two main reasons (in addition to the legally required shams referred to as “fairness opinions”): Execution and Connections. Of those things, connections are higher-value and inextricable from conflicts. If you're hiring someone to sell you to Company X, a bank who has done work for Company X - heck, who owns 20% of Company X - is the bank you want. And sure maybe their "conflict" will cause them to advise you to sell for a lowball price so that Company X appreciates them more but, hey, nobody's forcing you to take their advice. So, yes, this is all true. But he's maybe a little too harsh on the commentators and their misconceptions.