When Northrop Grumman Corp. completes its $3.8-billion purchase of Litton Industries Inc. next month, the biggest beneficiaries may well be Litton's top executives, who could end up with $168 million in compensation.
According to a filing with the Securities and Exchange Commission on Thursday, the bulk of the merger-related largess will go to five senior executives at Litton, who could take home $110 million in vested stock options, severance and lump-sum supplemental retirement payments.
Although the so-called "change-of-control" compensation may seem staggering, it is not unusual in the high-stakes world of corporate mergers and acquisitions, where even chief executives who are fired can earn as much as $50 million, analysts and executive-pay consultants say.
Woodland Hills-based Litton agreed to be acquired by its cross-town rival in December in a deal that would unite two storied California aerospace companies and create one of the nation's largest defense contractors.
"It's a typical golden parachute," said Nell Minow, a shareholder activist and editor of Corporate Library, a Washington-based firm that posts chief executive employment agreements on the Internet (http://www.thecorporatelibrary.com). "It sounds like a lot, but the idea behind it is that you don't want your company executives to turn away worthy combinations because of their concern for their jobs."
Litton shareholders also seemed unfazed by the large compensation package, saying they were relatively happy with Northrop's offer to pay $80 per Litton's share. The stock was hovering around $60 per share when Northrop made the initial bid.
The executive compensation "seems like a high amount, but I don't know if there have been many questions raised about it," said John Chevedden, a shareholder activist.
Aerospace analysts said the compensation package was not unlike what Northrop had structured for its executives when Lockheed Martin Corp. proposed a merger in 1997. Although the merger was blocked, Northrop executives stood to gain about $160 million.
In the SEC filing, Litton said Michael R. Brown, its chairman and chief executive, would collect $7.8 million from options and deferred shares that would be vested with the completion of the merger. Brown, who plans to retire, would also receive $6.2 million in severance pay, or three times what he earned last year plus bonuses, as well as nearly $20 million in supplemental retirement funds paid by the company.
In all, Brown, who has been with Litton since 1968, will receive nearly $36 million.
Litton officials defended the plan and said the total amount of compensation may be significantly less if Litton executives are retained by Northrop and severance payments are not required. With the exception of Ronald D. Sugar, who will become Northrop's corporate vice president, a Northrop spokesman said no decision has been made about Litton's management.
"Litton, like most Fortune 500 companies, has a number of performance incentives to reward and protect the officers and the employees," said Randy Belote, a Litton spokesman. "It's our view that the projected costs are both usual and customary."
The latest SEC filing also provided insight into the deal, showing Northrop had first offered a significantly lower price for Litton's shares.
According to the filing, Northrop initially offered $60.73 per share. The Litton board rejected several offers before agreeing to a price of $80 per share, a 26% premium over the stock price at the time.