Duke CEO sucker punch a value lesson for investors
By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Leadership is supposed to have its privileges. So naming the chief executive was a prize electric firm Progress Energy demanded when selling itself to larger rival Duke Energy. In return they accepted a tiny premium. That Progress’ man Bill Johnson lasted only hours in his job is a reminder to investors never to sacrifice value for the prestige of getting the top job.
When Jim Rogers, Duke Energy’s veteran chief executive, consummated his takeover of Progress in January 2010 he joked with analysts about arm-wrestling his successor as leader of the combined company. He noted that Johnson, a powerfully built former Penn State football player, was likely to win any such battle of strength. When it came to the power struggle, however, Rogers lost no time in slamming his rival.
This was an unequal match. After the merger Duke, whose shareholders owned 63 percent of the new firm, controlled 11 of the board’s 18 board seats. Former Progress directors understandably feel aggrieved at this unexpected act of aggression. One, John Mullin, described it as “one of the greatest corporate hijackings in U.S. business history.” At the time the Progress board accepted a tiny 4 percent takeover premium, modest even by the standards of the electric sector.
The ousting of Johnson is hard to explain in anything other than Machiavellian terms. True, one of Progress Energy’s nuclear reactors in Florida is having some costly technical problems. Still, such mishaps are not unheard of and should not disqualify Johnson from leading the combined group. Rather it seems that Rogers and his entourage were unwilling to play second fiddle.
Nobody comes out of this looking good. Anyone negotiating with Rogers in the future is likely to be extra cautious. Those who handled Progress’ side of the deal end up seeming hopelessly naïve.
To be sure, there is no clear financial loser here. Johnson walks away with close to $45 million and shares in the combined company are up about 30 percent since the deal, slightly more than rivals. Still, the lesson for investors is clear. Compromising on a premium in exchange for leadership is a mug’s game.