After 18 months of dotting every “i” and crossing every “t,” the only thing left for Duke Energy (NYSE:DUK) to do after its $32 billion merger deal with Progress Energy closed last Monday was pop champagne corks in celebration.
Instead, the nation’s largest utility is embroiled in a firestorm of controversy after the combined entity’s board forced the new CEO — former Progress Chief Bill Johnson — to resign one day into the job. His replacement? Duke CEO Jim Rogers — who initially had agreed to become executive chairman of Duke’s board. Instead, Rogers will now be chairman and CEO of the merged company.
While the details of what happened remain sketchy, the story that has emerged so far reads like a post-merger coup d’etat. The deal Duke and Progress shareholders overwhelmingly approved last August designated Johnson president and CEO of the merged firm and Rogers executive chairman of the board. That new board was to comprise 11 Duke directors and seven Progress directors.
But somewhere between shareholder approval and closing the deal, Progress leadership’s best-laid plans went terribly awry. Johnson’s employment contract took effect when the merger closed last Monday morning. But that very afternoon, the new Duke-dominated board met and concluded that Johnson was out as CEO and Rogers was in, according to The Wall Street Journal.
The surprise move sparked howls of protest from former Progress Energy insiders, as well as expressions of concern from some Wall Street analysts. In letters to the Journal and The New York Times DealBook blog, Progress’ former lead director John Mullin characterized the move as “one of the greatest corporate hijackings in U.S. business history.”
Standard & Poor’s placed DUK on a credit watch, as analyst Dimitri Nikas noted that “the sudden shift in management raises concerns about effective corporate governance, successful handling of the anticipated merger integration, and the ongoing effective management of pending challenges that face the combined entity.”
Duke gave few official details of the change, noting as part of its merger closing announcement that Johnson had resigned as president and CEO of the combined company “by mutual agreement” and that the board had appointed Rogers to take the helm “effective immediately.”
Duke has declined to provide further details, but industry sources say Rogers has embarked on a charm offensive to calm regulators and others in recent days. DUK shares slipped nearly 4% on Friday.
So what does it all mean for investors? Here are three takeaways from DUK’s “CEO-for–a-day” snafu:
Johnson’s Hefty Farewell Check. Rest assured, Johnson will be well compensated for his one day as the head of the merged utility giant: Duke is paying him a $10.3 million cash severance. However, that figure doesn’t count pension, deferred compensation, vested stock and tax reimbursement which, if awarded, could bring his total payday to $44.7 million. That would mean Johnson’s one day as CEO cost DUK shareholders nearly $1.9 million an hour.
A Tougher Job Integrating the Two Companies. So-called “mergers of equals” are always challenging affairs that must be managed with both efficiency and finesse. Former Progress employees are likely to view Johnson’s ouster as a betrayal by the new partners and fear further blood-letting in their ranks. Cultural differences between the two companies will be magnified as the steady, low-key Johnson’s subordinates adjust to the mercurial Rogers.
Regulatory Roulette. The management change also didn’t sit well with the North Carolina Utilities Commission, which had given the merger a regulatory green light on June 29. The commission’s general counsel on Friday said his office was mulling what to do in the wake of Johnson’s ouster. By law, the commission has the authority to “rescind, amend or alter” its approval. Key commissioners have begun to question whether Duke officials “lied” about their intentions, according to the Charlotte Observer.
Bottom Line: Johnson’s departure will cause big headaches for DUK in the near term as the controversy continues to swirl. Longer term, the board has unnecessarily created enemies on Wall Street and in regulatory agencies — never a wise move when at some point you’ll need to obtain credit, raise rates or re-icense nuclear reactors.
In his letter to the Journal and DealBook, Mullin wrote he did not believe “a single director of Progress would have voted for this transaction as structured with the knowledge that the CEO of Duke, Jim Rogers, would remain as the CEO of the combined company.” Those feelings of betrayal aren’t likely to pass soon and may trigger more unintended consequences for Rogers and his company.
I think DUK is a cautious hold right now. But keep an eye on two potential sell signals: adverse rulings by North Carolina regulators and any further actions by former Progress directors or shareholders.
As of this writing, Susan J. Aluise did not hold a position in any of the securities mentioned here.