Human Capital & Careers

Merck Shields Execs with Severance Plan

After a Vioxx-induced stock slide, Merck aims to protect key executives against potential fallout from "fundamental" changes in the corporation.
Stephen TaubNovember 30, 2004

Do Merck & Co. officials fear a hostile takeover?

It seems so, given the terms of the severance arrangement it announced Monday for 230 executives. The new plan covers members of the management committee and vice president-level managers. The participants would receive the severance benefits if they are fired within two years following a change in control of the company.

Until recently, Merck seemed an unlikely takeover target. But the stock of the embattled drug maker plunged about 38 percent in two months after the company pulled its blockbuster arthritis drug Vioxx off the market after a study concluded it doubled the risk of a heart attack and stroke.

As a result, Merck adopted the severance plan in part to avoid “the distraction and loss of key management personnel that may occur in connection with rumored or actual fundamental corporate changes.”

“Merck’s plan signifies the company’s valuation has fallen so low that another company could try to acquire it, and that Merck’s management is vulnerable,” Deutsche Bank analyst Barbara Ryan told Reuters. She noted that before the stock-price tumble, Merck’s size made it more of an acquirer than a target, but “now the reverse is true.”

Raymond Gilmartin, Merck’s chief executive officer, has said consistently that he is not interested in a merger, according to Reuters.

The company defines change of control as a liquidation, merger, reorganization, or consolidation; an acquisition of more than 20 percent of the company’s voting securities; or a change in board membership that relegates current directors to minority status. An exception would apply if Merck shareholders held at least 60 percent of the voting securities of a successor company.

If a change of control occurs, the eligible severance participants receive a cash pay out equal to a multiple of the sum of their base salary plus a target bonus. Plan participants who are fired are also entitled to receive a pro rata annual cash bonus.

U.S.-based participants would also continue to receive medical, dental, and life insurance benefits through the age of 65. Further, those who participate in the company’s supplemental retirement plan are entitled to receive enhanced supplemental retirement benefits.

If executives participate in the company’s tax-qualified pension plan, and would attain specified age and service levels within two years following the change in control, the individuals are entitled to subsidized and/or unreduced pension benefits upon commencement of the participant’s pension benefits.

Merck’s board also amended the company’s 2004 incentive stock plan. The amendment applies to equity grants made after Nov. 23, 2004.