A very rich sauce
On Valentine’s Day, when Berkshire Hathaway announced it was tying the knot with H.J. Heinz Company (NYSE:HNZ) , I asked whether Warren Buffett was overpaying for the maker of the iconic ketchup brand. My answer was no — he was getting value for his dollar. However, according to a filing made by H.J. Heinz Company (NYSE:HNZ) with the SEC yesterday, if Berkshire and 3G Capital fire H.J. Heinz Company (NYSE:HNZ) CEO William R. Johnson, he is entitled to receive a “golden parachute” payment worth $56 million. Should he walk out the door of his own volition, however, he will receive a mere $40 million. Every worker should wish for such a well-structured contract — “Heads, I win; tails, you lose.”
Is Mr. Johnson worth this sort of largesse? According to Bloomberg: “Johnson … has made about 40 acquisitions, helping expand the company into emerging markets. He streamlined the brand portfolio, boosted spending on marketing and ratcheted up innovation, including Dip & Squeeze ketchup packs.”
All well and good, but how have long-term shareholders fared as a result? The following chart shows H.J. Heinz Company (NYSE:HNZ)’s performance (on a total-return basis) since April 30, 1998 — the date on which Johnson assumed the position of president and CEO — relative to that of the S&P 500:
HNZ Total Return Data by YCharts.
From start to finish, H.J. Heinz Company (NYSE:HNZ) has beaten the index by a pretty good margin, but it’s worth noting two things:
- Over most of the period, Heinz was either trailing or barely ahead of the market.
- Most of the outperformance is due to Berkshire and 3G Capital’s bid for the company. This becomes very clear once we reproduce the same chart with an end date one day prior to the announcement of the acquisition:
HNZ Total Return Data by YCharts.
After announcing the bid, Warren Buffett said he hoped Johnson would stay on as CEO, and Johnson himself is game. Buffett didn’t negotiate Johnson’s original employment contract, so he may be holding his nose in that regard. It’s not the first time he has paid up (and, perhaps, overpaid) for executive talent: When Berkshire acquired specialty chemicals maker Lubrizol in 2011, CEO James Hambrick received a whopping $97 million “change of control” payment. It’s hard to justify that as value for money.
The article Did Buffett Overpay for Heinz’s CEO? originally appeared on Fool.com and is written by Alex Dumortier, CFA.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends Berkshire Hathaway and H. J. Heinz Company. The Motley Fool owns shares of Berkshire Hathaway.
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