Enterasys proxy papers detail exec compensation packages

Mark Aslett, chief executive officer of Enterasys Networks, will receive a $1 million bonus after the company goes private, part of a lucrative and complex compensation deal for key executives that held up the sale of the company, according to a preliminary proxy statement released by the company earlier this month to the Securities and Exchange Commission.

The company announced its sale to a group of private investors last month, but the proxy statement is the first detailed look at the decision. The massive disclosure statement will be sent to shareholders so they can vote on the merger on an unspecified date next year, but those shareholders who wish to take an advanced peak can do so at the SEC’s Web site.

The Enterasys sale is the latest step in the demise of Cabletron Systems, the company co-founded by former Gov. Craig Benson that had once been New Hampshire’s largest employer. Enterasys was the largest spinoff company of Cabletron, which dissolved itself into four firms in 2001.

Enterasys, beset by fraud (a former CEO, Henry Fiallo, pleaded guilty in 2004 to securities fraud, and several other former executives are currently fighting similar charges), has been steadily losing money and market share and has shrunk to a fraction of its former self. In 2003, it abandoned its New Hampshire headquarters for offices in Andover, Mass.

Anatomy of a deal

Here is a brief synopsis of the history of the sale, according to the proxy statement:

The company tried to revamp its product, offering to focus on network security, but it realized in early 2004 that it should consider joining up with new partners in order to make a serious run at Cisco Systems, the dominant player in the industry. So in March of 2004 it contacted the giant banking company JP Morgan to see how to go about it.

JP Morgan quietly floated the idea to select companies that Enterasys might be for sale, but there were few offers. In November, the CEO of another company expressed interest to Enterasys’ former CEO, William O’Brien, and discussions continued for several months, culminating in an offer to buy the company at $13.21 a share (relative to Enterasys current price, which was recently enhanced by an 8-to-1 reverse stock split). But the bid was considered too low.

Between December 2004 and March 2005, the company considered buying an enterprise data networking business, but the deal fell through because of the sellers’ concern that Enterasys would not be able to obtain financing. Following that debacle, JP Morgan started feeling out private equity firms. The progress accelerated when Enterasys announced in April 2005 its first-quarter results, reporting that its revenue was decreasing and losses were mounting, The share price dipped to 70 cents (a price that equates to $5.68 per share after the 8-for-1 split), earning the company a delisting warning from the SEC.

Major institutional holders were urging the company to sell. In the summer, the bidding began, and the company submitted letters to nine companies. Gores Group and Tennenbaum Capital Partners submitted the winning bid, eventually agreeing on a price of $386 million, or $13.92 a share, easily beating the next bid of $13.60 a share.

But the deal was held up until a compensation deal was arranged for Enterasys’ top executives.

Board members on the merger committee — none of whom is an affected executive — said that they were concerned that unless a favorable compensation deal could be reached on behalf of the executives, a “negative employee reaction” could result in “increased employee attrition, including within senior management” which could cause a “material adverse effect on the Company.”

That, they argued in the statement, could create a risk that the transaction “might not close at the agreed price, or even close at all.”

Eventually, board members agreed to pay a law firm to negotiate a deal for the executives, which was consummated on Nov. 9. The merger agreement was signed two days later, and was announced Nov. 14.

The executive deal includes accelerated stock options (O’Brien’s total options are $1.1 million and Aslett’s are $440,000), 40 percent of their previous bonus and benefits of the last quarter of 2005. If the executives stay, they could receive a performance bonus equal to their base salary — twice that amount in the case of Aslett, plus the aforementioned $1 million bonus, payable at the closing of the merger. Finally, Aslett would get some $700,000 worth of stock in the new company and will have the right to buy (along with other executives) 10 percent of the private firm.