Telcordia CEO $trikes $ell-Off DealTelcordia CEO $trikes $ell-Off Deal

Telcordia Technologies Inc. CEO Matt Desch is in line for a bonus potentially worth millions of dollars if he can find a buyer for his company.

Telcordia's parent company, Science Applications International Corp. (SAIC), has been inviting bids for its OSS business since the summer (see Source: Telcordia Sends Out Feelers and Telcordia With Fries?).

Now the company has signed a new "Executive Change in Control, Incentive, and Severance Agreement" with Desch that will see the CEO land a bumper bonus if he can find a buyer, and ensures him a seven-figure sum if he is subsequently let go by a new owner.

In the company's quarterly statement for the three months ending July 31 filed with the Securities and Exchange Commission (SEC) earlier this week, SAIC noted that it "began to explore various strategic alternatives relating to its ownership in Telcordia" in July this year, when Light Reading first reported on the matter (see SAIC May Sell Telcordia).

"These alternatives include aligning Telcordia with an additional or different owner that may add strategic value to Telcordia. These efforts are in the preliminary stages and may involve, among other things, the partial or complete sale of the Company’s interest in Telcordia," notes SAIC's management in the document. Partial sale? That sounds like an idea (see Telcordia: Let’s Split).

But of course, "At this time, there can be no assurance that these preliminary efforts will lead to an agreement or completion of a transaction of any kind," SAIC states. That last scenario wouldn't be good news for Desch's bank manager, though the CEO isn't doing so badly even without a sell-the-company bonus: His annual salary is $500,000, and his bonus is up to $750,000.

So what sort of deal has the CEO landed?

SAIC notes that the new agreement with Desch was struck "in contemplation of the possibility of a partial or complete sale of SAIC’s interest in Telcordia." If certain conditions are met, Desch will "be eligible for an incentive bonus upon a change in control, the amount of which is dependent upon Mr. Desch’s base salary and the value of the change in control transaction. The incentive bonus would be payable in installments over a two-year period after the close of a change in control transaction, provided that Mr. Desch is still employed on the applicable payout dates."

And if he's not still employed by any new owner on the trigger dates? He'd still be quids in. If his employment is "terminated" (presumably not by Arnie) before any acquisition is closed, or before the second anniversary of any acquisition agreement, or within two years of a takeover, he would, "provided that certain conditions are met... be entitled to payment of the unpaid incentive bonus and severance pay for 18 months in addition to his accrued salary and bonus." Oh, and then there's housing and relocation expenses to add on, too.

With 18 months' pay being worth at least $1.5 million, that means Desch could be in for a multi-million dollar payout if he can find a buyer and finds himself surplus to requirements by any new owner. That's quite an incentive for the CEO, but may cause further unrest at a company already suffering from appalling staff morale now that Desch has an incentive to find the highest bidder instead of a buyer that might be the best fit for the company and its staff (see Inside Telcordia's Discord ).

In an email response to questions about Desch's agreement, Telcordia's spokeswoman stood by her chief. "We believe that a successful sale of Telcordia and continued growth for the company will benefit employees. We also think Matt is critical to our continued transformation and a successful transition to a potential new owner. "The employees are encouraged by the potential growth opportunities and are confident that Matt Desch will lead the process to a successful conclusion -- one that is in the best interest of our employees, customers, and the industry at large."

The CEO may have his work cut out to find a buyer at a decent price, though, as Telcordia is hardly flourishing at present.

SAIC's figures for its second quarter show increasing revenues for the whole company, up to $2 billion from $1.67 billion a year earlier (see SAIC Reports Q2 Profit). However, Telcordia's contribution to those revenues were just $217 million, down from $223 million a year earlier (though it's worth noting that these are the sort of revenues that other OSS players can only dream of).

That may not seem too bad, given the slow recovery of the telecom sector. In addition, the latest quarter's sales are up from the first quarter's $206 million. However, the second quarter's numbers include, for the first time, sales from Telcordia's latest OSS acquisition, inventory management system firm Granite Systems, which was bought in May (see Telcordia Shells Out at Last). Analyst estimates put Granite's quarterly sales at anything between $12 million and $25 million.

And the long-term trend for Telcordia's revenues has been downwards. Based on the first six months of this year, Telcordia is in line for annual revenues this year (fiscal 2005) of around $850 million. In fiscal 2004, Telcordia recorded revenues of $892 million, while in 2002 that figure was $1.44 billion. Now Telcordia is looking at every way possible to bump up its numbers (see Telcordia Sues Alcatel, Cisco, Lucent, Telcordia's Softswitch Timebomb, and Telcordia Pockets Patent Payment).

SAIC notes that the decline in revenues is due mainly to pricing pressure from the RBOCs, all four of which have contracts in place for systems maintenance during calendar 2005, though only two are currently signed up for such business for 2006. Any new owner would likely want to see all four signed up for that year and beyond. And while SAIC notes that there is a strong focus on diversifying the OSS business into the wireless and international markets, "continued pricing pressure or loss of business from the RBOCs or other commercial customers in the global telecommunications market could further reduce revenues and continue to adversely impact our business."

None of this is going to help Desch cash in on the new incentive scheme. And to add to the potential pitfalls, there's always the prospect that Telcordia might take a significant financial hit from its ongoing legal wrangle with South African incumbent operator Telkom SA Ltd., which is claiming $300 million from the vendor (see Telcordia Prepares for Court).

In addition, the impending departure of Granite's figurehead, Jay Borden, will hardly help matters (see Telcordia: Bye Bye Borden). Others have left the building, too. SAIC notes that Telcordia has "continued to have involuntary workforce reductions" of 113 from its staff in the six months to July 31 "to realign its staffing levels with lower telecommunications revenues."

— Ray Le Maistre, International News Editor, Light Reading