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Spinoff Transactions and Founder Awards

November 6, 2014

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Why are Spinoffs Important?

Spinoffs serve an important economic function, allowing parent organizations to refocus themselves on core competencies and spinoff companies to pursue their own business goals, perhaps through seeking new buyers with whom they could achieve greater strategic, legal, or technical synergy.

Of course, the successful completion of any spinoff transaction presupposes the presence of motivated executives to lead both the newly independent spinoff company and the parent company, whose business circumstances might have been fundamentally altered by the spinoff. So-called “founder awards” for executives are one potential tool that companies consider when confronting these situations.

Analysis of 14 Spinoff Transactions

The following analysis examines founder awards made to executives in conjunction with 14 spinoff transactions among U.S. public companies taking place between January 2011 and February 2014 where spinoff companies exceeded $1 billion in revenue at the time of the spinoff. The analysis encompassed a total of 107 executives. All compensation data were obtained from publicly disclosed SEC filings, primarily proxy statements, also known as DEF 14A filings. The revenue of parent companies ranged from a low of $5.7 billion to a high of $54.4 billion, and revenue of spinoff companies ranged from $1.2 billion to $19.3 billion.

Awards were often granted to executives of parent companies in addition to executives of spinoff companies, as many of the same circumstances that apply to spinoff companies also apply to post-spinoff parent companies. Spinoff transactions are usually extremely complex undertakings, and the responsibility for execution often falls, to a significant extent, on the shoulders of parent executives.

Largest Awards

The largest awards included in the analysis were a $34,190,487 option grant and a $9,433,055 stock grant, both made to Dr. Sanjay Jha, who was the CEO of Motorola Mobility in January 2011 when that division was spun off from Motorola. The spinoff of Motorola Mobility was a particularly large transaction, as Motorola Mobility’s revenue was fully 59% of Motorola, Inc.’s revenue prior to the spinoff. Although the terms of Dr. Jha’s awards were delineated in his employment agreement, founder awards can and usually do take on a more discretionary flavor.

Motorola Mobility held a valuable array of intellectual property and internal expertise pertaining to cellular phone technology. Google, eager to defend itself from lawsuits and advance its push into the mobile phone market, acquired Motorola Mobility for $12.5 billion in May of 2012.

The need for executives to share the incentives of shareholders is especially acute during tumultuous periods of spinoffs and acquisitions like the one faced by Motorola Mobility, both to foster near-term leadership stability and to ensure that executives do not resist value adding acquisitions that might also necessitate a change in leadership. Dr. Jha separated from Motorola Mobility in connection with the acquisition, and Google has since announced plans to sell Motorola Mobility to Lenovo for $2.9 billion.

Award Composition

Although, as Dr. Jha’s case illustrates, founder awards come in a variety of shapes and sizes, in this sample of spinoffs they overwhelmingly consisted of restricted stock units and options. In Figure 2 we see the percentage of both parent and spinoff award recipients who received awards consisting of each type of compensation vehicle.

Eight Parent CEOs, 14 spinoff CEOs, 33 other parent executives, and 52 other spinoff executives were included. Option awards were quite popular, going to 68.3% of parent company executives who received founder awards, while restricted stock units went to 78.0% and 83.3% of parent and spinoff executives, respectively.

Vesting

Because retention of key executives throughout spinoff situations is often deemed important to company success, vesting conditions can take on added significance in such situations. Small cash payments serving as rewards for spinoff-related performance generally came without vesting conditions, or else with short vesting periods of one year or less.

Founder equity awards in spinoff situations were usually granted in accordance with stated retention goals, and the vast majority of such awards carried with them long-term vesting periods. Overall, 66.0% of founder equity awards used three-year vesting periods, and 31.1% used four-year vesting periods. All four-year vesting awards vested in multiple installments (“graded” vesting), while three-year awards exhibited a mix of graded and all-at-once (“cliff”) vesting.

Four of the 14 spinoff companies and three of the thirteen parent companies granted executives equity with performance-based vesting conditions. The metrics used included gross margin, relative total shareholder return, earnings before interest, taxes, depreciation, and amortization, returns on invested capital, and stock price.

Conclusion

Though the spinoffs examined herein are but a small sampling of spinoff transactions, a wide variety of award sizes and types manifested themselves in the data. This serves as a reminder that no two spinoff situations are ever exactly the same, and that this variety is reflected in compensation arrangements.