Medco’s merger-RX for executive security…

Since Medco Health Solutions, Inc. (MHS) and Express Scripts, Inc. (ESRX) announced their intentions this past June to combine forces in a $29.1 billion merger, the top dogs at both companies have been busy lobbying Congress and officials at a host of federal agencies to convince them that the deal won’t violate antitrust laws and that it will be good for consumers. But the merger proxy that Medco filed on Friday convinced us of a different point: Its named executive officers will get multi-million-dollar payouts if the merger goes through and they subsequently lose their jobs.

The disclosures come in the “Golden Parachute Compensation” section of the filing, on page 182, just in case you didn’t make it that far. The numbers used are just an estimate, based on the hypothetical scenario that the merger had been approved, and that Medco’s named executive officers had been terminated on October 31, 2011.

Medco’s Chairman and CEO, David B. Snow, Jr., stands to gain more than $38.96 million if he is terminated within a year after the merger closes. Of that sum, $12.6 million would be paid as cash severance and more than $26.34 million for Snow’s equity interests.

Other top executives would also get nice payouts: President and Chief Operating Officer, Kenneth O. Klepper stands to get more than $15. 7 million; Senior Vice President, Finance and CFO, Richard J. Rubino, could receive nearly $10.33 million; General Counsel, Secretary and President, Global Pharmaceutical Strategies, Thomas M. Moriarty, could get more than $9.76 million; and Group President, Employer/Key Accounts, Timothy C. Wentworth, may receive more than $9.12 million.

But whereas Snow’s entitlement to the money (per his employment agreement) is conditioned upon the merger closing and him being terminated within a year, the other four executives’ rights come from the Change in Control Severance Plan; thus, they are protected if a qualifying termination occurs within two years following the Medco merger.

These numbers could “materially differ” from amounts that may actually be paid, but – based on the explanation in the merger proxy – it seems far more likely that the payout numbers would go up, not down:

“The amounts reported below are estimates based on multiple assumptions that may or may not actually occur, including assumptions described in this joint proxy statement/prospectus, and do not reflect certain compensation actions occurring before completion of the Medco merger (such as the grant of stock options and RSUs in respect of 2011 performance and payment of 2011 bonuses)….”

Express Scripts and Medco are independently holding special shareholders’ meetings at the same time on December 21, and it remains to be seen whether their shareholders will approve the deal. The filing also disclosed that both companies are currently working on their responses to the Federal Trade Commission’s Request for Additional Information and Documentary Material. After that, the DOJ, the FTC, state attorneys general, and possibly others could file suit to block or restrict the merger. But it seems clear that Medco’s top executives don’t have to worry about missing their mortgage payments if the merger goes through and they subsequently find themselves out of work.

Meanwhile, Medco employees continue to have questions about the deal, judging by this 8-K that the company filed late Friday. One of the first questions had to do with which executives plan to stick around post-deal. We thought the answer, which of course relates to the pay-outs, was worth including here:

“The complete and extended leadership team for the new organization is still under review and has not been decided. Medco’s senior executives remain committed to ensuring the merger is completed and that the transition positions the new entity for its continuing success.”

Suffice it to say that that sounds like a lot of fancy words to not really answer the question on whether the executives are staying or leaving.

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Data source: Morningstar Document Research


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