Delphi's Bankruptcy Plan Is Gold for Management
Bloomberg
By Graef Crystal (Commentary)
Nov. 17, 2005
Call it tacky, unseemly or crass.
Your choice. Mine is all three.
To Delphi Corp., it's acceptable: To survive bankruptcy and emerge as a viable company, persuade a bankruptcy judge to approve a lavish set of self-enriching compensation plans for a corps of executives, while simultaneously doing everything to slash worker pay and benefits.
Reminds me of attorney Joseph Welch's accusation aimed at Senator Joseph McCarthy during hearings in the 1950s, in which McCarthy attacked the U.S. Army for being filled with communists: “Have you no decency sir, at long last!”
It's not that Delphi shouldn't keep good managers and bring in others from outside the company: It's that what is being recommended is way too much.
Delphi, aided by compensation consultant Watson Wyatt Worldwide and by the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, is trying to assure itself that the company's top management will be doing just fine even if its workers take it on the chin and in the gut. Those more than 33,000 workers face wage cuts to $9.50 an hour from $27.50, as well as reduced pensions and other benefits.
Troy, Michigan-based Delphi is peddling the argument that to survive bankruptcy, its top management team has to be paid handsomely, or else all will shortly depart for greener pastures.
That argument raises three questions:
-- Why keep in place a top management team that has already demonstrated its inability to, well, manage?
-- For those with industry-specific experience, just where are those greener pastures? Hello; the entire U.S. automotive industry is in deep trouble.
-- For those with skills that can be useful in other industries, why can't Delphi easily replace them, if necessary?
The talent pool here is huge.
The executive compensation proposal has four parts, and there's quite a bit wrong with three of them. First, we have a new annual incentive plan. The performance metric upon which bonuses will be predicated is earnings before interest, taxes, depreciation, amortization and restructuring costs (EBITDAR for short). EBITDAR goals will be set for six-month periods, with participating executives afforded the opportunity to earn bonuses twice a year.
What's wrong?
-- Delphi creditors may not be overjoyed to find that the top management's pay will be insulated from the burden of interest costs. Under current arrangements, bonuses are predicated on net earnings, a metric that implicitly penalizes management for taking on debt that doesn't pay for itself in the form of increased profits.
-- And eliminating “restructuring costs” could offer considerable temptation to move other costs into that category and therefore increase bonuses.
-- In its pleading, Skadden Arps claims that shortening the incentive window to six-months will “increase the incentive to meet the targeted goals.” If that's the case, why stop at six months? How about once a week? A six-month bonus program allows a participant to earn a bonus at least for half a year's good results even though the full-year results are abysmal.
Part two of the proposed new executive pay arrangements features a new “Emergence Bonus Plan.” Under it, participating executives can earn cash bonuses ranging from 30 percent to 250 percent of their salary “upon confirmation of the plan of reorganization or a sale of all or substantially all of the company's assets.” The higher you are in the food chain, the higher is the cash bonus opportunity.
What's wrong?
-- Skadden Arps makes the following statement in its pleading: “Noticeably absent is any form of retention plan.” It also states: “The Key Employee Compensation Program does not include a retention or stay component which differentiates it from other incentive programs.”
Really! You could have fooled me.
If you can get a cash bonus of 250 percent of your salary for staying with the company, how can that not be characterized as a “stay” or “retention” bonus? Ah, lawyers. What they can do with words is an amazing thing to behold.
Under the third part of the proposed new arrangements, we have tons of company stock, rather than cash. Assuming Delphi emerges from bankruptcy, it is proposed that equity incentives equal to 10 percent of the new common shares outstanding be available for distribution to 600 executives. A third of those awards would be in free shares with the rest in stock option grants.
Again, what's wrong?
-- To justify carving aside such a lavish amount of equity, Watson Wyatt has presented some statistics that, to my way of thinking, have, at best, dubious utility. Among other things, Watson Wyatt says that other companies coming out of bankruptcy typically reserve about 11 percent of equity in the first year after their emergence. It also says that the median company among those comprising the Standard & Poor's 500 Index reserves 13 percent of its equity over a “three to five year period.”
So which is it: Three years? Five years? Or four years? It makes a big difference. Besides, it's hard to find in the proposals any ironclad guarantee that all that equity won't be airdropped over Delphi's headquarters on a single day --like the day after the company emerges from bankruptcy. If that happens, you can be sure that the company's management will shortly be back to its compensation committee, with tin cups rattling away.
-- In its presentation, Watson Wyatt assumes that Delphi will emerge from bankruptcy with a market cap of approximately $4 billion. If that assumption holds, and if Delphi's stock goes on to double, then 600 participating executives will earn $400 million from their equity grants.
For a group that large, that's a pretty impressive amount.
Remember, too, granting free shares and option shares equal to 10 percent of the shares outstanding says nothing about what percentage Delphi's executives will haul away from any increase in the company's future stock price.
I have tested the proposed handout all the way to a future market price that is 20 times the initial price coming out of bankruptcy and still can't get to a point where executives are taking out as little as 10 percent of the increased stock price.
Think also that if the future stock price remains the same as the initial price or falls, the management takeout, compared with the increase in market price, becomes infinite. Nice deal for executives. Not so nice for shareholders.
To get a better handle on this 10 percent proposal, I selected all 30 U.S. publicly-traded companies with total employee headcounts in the range of 125,200 to 245,200.
(Delphi's current headcount is 185,200, right in the middle of this range.) For the year 2004, the median company granted stock options that, in number, were equal to just 1.1 percent of the shares outstanding. To be sure, some of those companies would also have made some free share grants, as well.
So perhaps the 1.1 percent might rise to, say, 1.5 percent, were those free share grants to be counted. Still, on the basis of this analysis (which relies on Aon Consulting's eComp database), I can't get to 10 percent, except over, say, six to seven years. Remember here that Delphi's headquarters are in the Detroit metropolitan area, not in San Jose. Detroit is not now, nor has it ever been, stock option heaven.
And finally, there is a severance plan -- though of relatively modest dimension -- for those who are discharged for other than cause or who resign for so-called “good reason.”
So there you have it. All bases covered. No deaths. No serious injuries. At best, a few ankle sprains requiring a bit of ice.
As for Delphi workers: Put those sea-sickness patches behind your ears. There's rough weather ahead.
I like this guy. He knows bullshit when he sees it.
Have fun,
Spencemo
OK, I put pen to paper (really, fingers to keyboard), and fired off a letter to Steve Miller, CEO of Delphi Corporation. As well as sending it to the NY Times, Washington Post, LA Times, Detroit Free Press, and a couple of other people. It won't make a damn bit of difference, but it did make me feel better...
Dear Mr. Miller,
As you have been straightforward with your employees to this point, please allow me to be straightforward with you as well. I took the time the other day to read the opening day presentation that was presented to the bankruptcy court outlining the reasons
It’s been said that when you know better, you do better. I believe a very good argument could be made that if our unions had a true financial picture of
Many locals, in fact, have competitive hiring agreements in place. I, myself, was hired under such an agreement. The unions have, in many cases, readily cooperated with management to reduce costs and keep our business viable. So to portray the cancer that is eating away at
If the unions are to be held accountable for accepting generous labor contracts, then management should bear responsibility of offering them when they knew they could ill afford them. Someone had to know what kind of financial shape
These beliefs that I hold, however, do not change our current situation. This bus has truly been driven off into the ditch, and your first key to righting the ship is to impoverish the hourly workforce whose sacrifices built this company to the giant that it is today. That is, sir, just a bit of a slap in the face.
To suggest slashing someone’s pay in excess of 60%, eliminating benefits and thousands of jobs in the process, is, well, more than “fairly dramatic”, as you put it. Perhaps such monumental proposals would be easier to bear if there were hope of bringing new business to these areas with the savings created by the cuts, but that doesn’t seem to be the case.
To the objective observer, one might think that the ultimate plan would be to eliminate all domestic production and reap the whirlwind overseas. I’m not too sure myself, but it seems more likely than not. It was the profits made here that allowed
I read somewhere that have said that you are aware of the stress these kinds of developments can create, and want to try to “soften the blow” to the affected employees. How, exactly, does one soften the blow of devastating the standard of living that it has taken a lifetime to create? To be brutally honest, once you leave Delphi, you can return to your semi-retirement in
It is heartbreaking to me that tens of thousands of my fellow hourly employees are in the same state of mind that I find myself in. We are scared. We find ourselves hanging on to the empty shells of what our dreams for the future used to be. The atmosphere that is created by this uncertainty in our workplace is nothing short of toxic. You urge us to keep our customers first in our thoughts and continue to produce world-class quality products. We’re doing it, but it is becoming increasingly difficult.
If the reality that “life is going to be different” isn’t already too much for many of us to bear, we must also bear your insults in the media. You speak of us as though we were ignorant, robotic human assets that aren’t worth the wage we’re being paid. I take great offense to that. Many hourly employees have taken advantage of countless hours of training made available to us. I am personally certified as a Six Sigma Green Belt (manufacturing), as well as one of our location’s hourly trainers for the IUE-Delphi Quality Network Problem Solving. All of these programs are intended to make our employees more efficient.
In closing, Mr. Miller, I would like to thank you for taking the time to read my letter. I doubt anything I have said will change the course of what is to come, but at least I will know that I have had the chance to speak my mind. You cannot realistically say that we are the bane of
Thank you for your time,
Spencemo
Now, let's talk about the dumbasses up in Lockport. This particular plant is sending out flyers telling their people to be prepared to strike the company. This really isn't a good idea. If they walk out, all they are going to do is ensure that their plant gets closed. It already isn't a profitable location, and all of this talk of a work stoppage not only endangers their plant, but others as well. Mr. Gettlefinger from the UAW needs to sit on these guys and get them to shut up. Soon.
It's going to be a long process. I better get some more beer.
Delphi Executives Named in Suit Over Sales Practices
The Wall Street Journal
By Jeffrey McCracken
Oct. 5, 2005
A detailed lawsuit filed against Delphi Corp. by two state pension funds and one of Europe's biggest employee-pension funds alleges the auto-supplier's senior executives encouraged inventory deals with a bank and two other companies that artificially boosted profits from 1999 to 2002.
The accounting moves, which involved selling inventory at the end of a quarter and booking the proceeds as income and cash flow from operations, are being examined in a securities-fraud investigation by the Securities and Exchange Commission and a related criminal probe by the Department of Justice.
Delphi has previously acknowledged it overstated earnings in past years, in part through deals involving third parties. But it is unclear whether senior executives were aware of the improper accounting, and details have been scant.
The suit alleges that Alan S. Dawes, Delphi's chief financial officer at the time, and other senior executives arranged approximately $440 million in deals in which Delphi sold scrap and unusable equipment to improve earnings during difficult quarters after Delphi was spun out from General Motors Corp. in 1999.
These deals helped Delphi meet or exceed quarterly earnings expectations for its first 19 quarters, according to the suit. After a quarter closed, Delphi reacquired the inventory, the suit alleges.
Delphi's senior management was so pleased with the inventory practices that a vice president of logistics once distributed a companywide memo praising the program and telling others to copy it, the suit alleges. Managers were also told to visit the plants where the inventory had been sold to "learn from their methods," according to the 290-page lawsuit.
The lawsuit was filed last Friday in federal court in New York. The $7 billion public pension fund for Oklahoma school teachers is named as the lead plaintiff. Others suing include the $16 billion Mississippi public-employees pension fund, which provides benefits to about 310,000 current and future state employees; Stichting Pensioenfonds ABP, the $178 billion pension fund for 2.2 million government and university workers in the Netherlands; and Raiffeisen Kapitalanlage-Gesellschaft, a mutual-fund firm based in Vienna with $40 billion in assets.
The lawsuit is being handled by the New York law firm of Bernstein Litowitz Berger & Grossman, which had a key role in the class-action suit in the WorldCom Inc. securities litigation that resulted in a $6.13 billion recovery.
Delphi spokesman Lindsey Williams declined to comment on the lawsuit. He said current Delphi executives or board members mentioned in the suit would not be made available to comment. Attempts to reach Mr. Dawes and Delphi's former chairman and chief executive, J.T. Battenberg III, were unsuccessful. Mr. Battenberg, who was also named as a defendant, announced his retirement in February, just a week before the SEC investigation was revealed. He stepped down this summer.
The suit cites deals in 1999 and 2000 involving a Tennessee purchasing-management firm called Setech. The suit alleges these deals, valued at about $145 million and involving inventory from Delphi sites such as plants in Kokomo, Indiana, and Reynosa, Mexico, artificially inflated Delphi's pretax income by $60 million in 1999 and $16 million in 2000, a period when Delphi traded near its $20-a-share peak. Delphi has previously acknowledged the amount by which pretax income had been inflated, but not details of the transaction or any involvement by Setech.
Setech's chief financial officer, Richard Eddinger, declined to comment on the lawsuit, but confirmed his company has been contacted by the SEC as part of its year-long Delphi investigation. The lawsuit adds to the mountain of problems at Delphi, which is trying to avoid filing for bankruptcy-court protection and is seeking help from GM and the United Auto Workers union.
Delphi, which has acknowledged that it is under federal investigation, completed an internal investigation in June, resulting in the restatement of earnings for 2001-2003. Mr. Dawes and several senior treasury executives were also forced out earlier this year as a result of the investigation.
Delphi has never given the names of the third parties it sold the inventory to. The suit cites several "confidential sources," such as former GM employees, Delphi managers, Setech officials and others as the source of its information.
The suit says many of the most egregious deals stopped in 2002, one quarter before Sarbanes-Oxley kicked in, but management spent the next two years trying to hide or make up for the artificial boost to their bottom line.
The suit names as defendants Delphi, the accounting firm of Deloitte & Touche, six former or current Delphi executives, 15 former or current board members, nine investment banks and three other companies Delphi did business with. Former parent GM wasn't named as a defendant.
Deloitte & Touche spokeswoman Deborah Harrington said her firm hadn't been served with the lawsuit and declined to comment.
The other companies that the suit alleges helped Delphi "present the investing public with a materially false and misleading picture of the company's cash flow, earnings and debt," are Bank One Automotive Group, since acquired by J.P. Morgan Chase & Co., and BBK Ltd., an automotive-turnaround firm based in Southfield, Michigan. J.P. Morgan spokesman Joseph Evangelisti declined to comment on the suit. BBK founder B.N. Bahadur said he hadn't seen the suit and declined to comment. Bank One and BBK have previously acknowledged being contacted by the SEC over the matter.
The suit says Delphi disguised a $200 million loan in December 2000 from Bank One as a sale of precious metals. Delphi used this money to report record cash flow from operations of $268 million for 2000, which was considered significant at the time because the rest of the auto industry was suffering from vehicle-production cuts, the suit alleges.
Delphi's actual cash flow from operations for the year was $68 million. It also didn't record the loan as a debt. A few weeks later, in January after the year-end close, Delphi bought back the assets, the suit alleges.
The suit says Delphi did about $89 million in similar buyback deals with BBK in 2000 and 2001. Quoting an unnamed "confidential source" that worked in the senior executive office of BBK, the suit claims Mr. Dawes was "directly involved in the transactions" with BBK and had a close relationship with Mr. Bahadur.
The bad news is that I work for a little auto supplier called Delphi. Heard of it? The four people who really know what's going on don't feel the need to share that information with the rest of us, so it's chaos on the shop floor. It's the nature of the beast...if you don't have the answers, make them up. What's happening is that someone will read a news article, take two or three points out of it and spin it into some sensational story to run their mouths about.
It all makes my brain hurt. I just want an accurate answer one way or the other. If I'm going to get screwed by my company, I'd like to have the opportunity to prepare myself for it. We all just want to know. Are GM & the UAW going to step up to the plate and get a deal done? I think GM just might, but the UAW scares me. These guys have their heads stuck in the 70's where strong-armed union bullying was the best negotiating tool. That shit doesn't work anymore. If the UAW doesn't bend, they'll condemn us all. Shit.
I guess we'll just have to wait and see...
That could have some advantages...no stress...no deadlines...make my parts and go home.
It would also have some disadvantages...pay cut...being in pain when I go home every day...no longer using my brain at work...
Ugh...everyone at home seems to think that I'll be OK, but I'm not sure right now. With what's going on at work, no one is safe. Oh well, I guess as long as they still let me come inside the plant when I come to work, it's OK.
My plant manager says that, if you're going to be affected, you'll know by Friday. That's great to have an answer, but it makes for a long week.
Please, just give...
...and pray.
| Next Page |
