Hi , I have some troubles getting through the concept of golden parachutes in corp fin. reading 32
As I understand , it is a lucrative compensation paid to senior management if they left the target company after a merger. so , why would they be interested in staying and why should we consider this as a pre offer defense mechanism for takeovers , I believe they would prefrer to get the compensation and leave , so what am I missing here ?
Well, if you buy a company, it’s not necessarily a good thing if all the managers quit. You might need them to run the company, after all. Additionally, golden parachutes increase the cost of takeovers, making them less economically attractive.
Actually, the intent in takeover defense is (usually) incumbent (target) management protecting their jobs. In the presence of golden parachutes arrangement, the acquirer has to factor in the payout needed to the incumbent management to fire them (golden parachutes) and this payout would increase the cost of the acquisition. In the case of a friendly merger (whereby you don’t fire the target company management), the issue of takeover defense does not arise.
okay , I get it now somehow , but would the senior management compensation be that considerable to be a factor of the cost of an acquisition ? . I always think of hundreds of millions of dollars for an acquisition vs. a couple of millions for the senior management.
considerable maybe, maybe not, but it’s still an issue