fw : getting a deal done - - - - - original message - - - - -
from : belden , tim
sent : thursday , december 20 , 2001 3 : 27 pm
to : lavorato , john ; whalley , greg
subject : getting a deal done
i recognize that we are in a very fluid process right now . however , i feel that i currently don ' t possess the information that i would need to make a decision about what structure and compensation would work for me and people on my team in newco . i will attemp to lay out the issues that concern me and provide thoughts on what i have heard about structures so far . excuse me if i am off on any ( or all ) of my facts . i am currently receiving mostly second - hand information from gas and power traders in houston .
here is the citibank deal as i understand it :
requirement to retain between 5 and 15 employees to do the deal .
fund ( at some unknown level ) a retention pool to be distributed in some unknown manner to an unknown subset of the 800 newco people .
800 employees
$ 30 million of 1 - day 95 % var
total 2002 costs of approximately $ 300 million .
bonus pool equals 20 % of ebit
bonus paid out 75 % in cash and 25 % in restricted stock with a 3 - year cliff vest .
here are my concerns
the cost structure appears to be well above what a $ 30 million var trading operation can support .
my recollection from west power rovar is roughly 90 % in 1998 , 120 % in 1999 , and close to 200 % in 2000 and 2001 . i ' m not sure how to handicap expected future rovar , but without additional information from the two of you i have a hard time expecting more than 100 % in a lower - priced commodity market . given that assumption , the $ 30 million one - day var becomes $ 480 million annualized var gives you gross margin of $ 480 million . i don ' t know what the capital and credit charges will be , for arguments sake let ' s call it $ 30 million . bonus pool equals $ 480 - $ 30 - $ 300 = $ 150 * 20 % = $ 30 million of which $ 22 . 5 is cash and $ 7 . 5 equity . i can ' t sign up for that math . please help me understand how / why my math is wrong .
i need to understand our cost structure in great detail . we need to figure out a way to allocate costs to the desk level . if i look at west power ( everyone in portland ) assume that we have 80 people with an average of $ 200 , 000 for base salary and benefits giving us total personnel costs of $ 16 million . add on another $ 4 million for rent , parking , travel and entertainment . . . and call it $ 20 million of direct expenses here . i figure that we can make $ 100 million in 2002 with lower var and starting up later in the year . how much of the $ 280 million remaining costs should i expect to be allocated to the west power desk . with an ebit of $ 80 million times 20 % i can sell . if we have another $ 50 million of allocated costs then i can sell this .
i recognize that the potential buyer is unlikely to fund a desk by desk ebit . however , i think that our goal should be to split the pie based on a desk by desk ebit and would like to see a proforma that accomplishes that .
proposed retention structure for three people in portland
a dollar amount paid in cash over one year and equity over two years . price tag tbd .
create certainty around the bonus / retention payments .
indemnify against payback of deferred comp .
clarify total retention dollars for the rest of the desk .
15 % of gross margin for 2002 . 20 % of ebit going forward .
other gripes
labor has not been invited to the negotiating table .
labor doesn ' t get to see the pro forma .
we are supposed to get paid based on ebit yet i have no control over the expense side or the allocation side .
labor is getting accused of holding up a deal that labor had no part in negotiating .
labor is the most important driver of the value of this deal and doesn ' t appear to have any rights other than to accept or reject a poorly defined structure .
i want to make this thing work . i am not trying to be greedy . i am finding it very difficult to navigate through this process given the very limited information that i have been given .
tim
fw : getting a deal done
- - - - - original message - - - - -
from : belden , tim
sent : thursday , december 20 , 2001 3 : 27 pm
to : lavorato , john ; whalley , greg
subject : getting a deal done
i recognize that we are in a very fluid process right now . however , i feel that i currently don ' t possess the information that i would need to make a decision about what structure and compensation would work for me and people on my team in newco . i will attemp to lay out the issues that concern me and provide thoughts on what i have heard about structures so far . excuse me if i am off on any ( or all ) of my facts . i am currently receiving mostly second - hand information from gas and power traders in houston .
here is the citibank deal as i understand it :
requirement to retain between 5 and 15 employees to do the deal .
fund ( at some unknown level ) a retention pool to be distributed in some unknown manner to an unknown subset of the 800 newco people .
800 employees
$ 30 million of 1 - day 95 % var
total 2002 costs of approximately $ 300 million .
bonus pool equals 20 % of ebit
bonus paid out 75 % in cash and 25 % in restricted stock with a 3 - year cliff vest .
here are my concerns
the cost structure appears to be well above what a $ 30 million var trading operation can support .
my recollection from west power rovar is roughly 90 % in 1998 , 120 % in 1999 , and close to 200 % in 2000 and 2001 . i ' m not sure how to handicap expected future rovar , but without additional information from the two of you i have a hard time expecting more than 100 % in a lower - priced commodity market . given that assumption , the $ 30 million one - day var becomes $ 480 million annualized var gives you gross margin of $ 480 million . i don ' t know what the capital and credit charges will be , for arguments sake let ' s call it $ 30 million . bonus pool equals $ 480 - $ 30 - $ 300 = $ 150 * 20 % = $ 30 million of which $ 22 . 5 is cash and $ 7 . 5 equity . i can ' t sign up for that math . please help me understand how / why my math is wrong .
i need to understand our cost structure in great detail . we need to figure out a way to allocate costs to the desk level . if i look at west power ( everyone in portland ) assume that we have 80 people with an average of $ 200 , 000 for base salary and benefits giving us total personnel costs of $ 16 million . add on another $ 4 million for rent , parking , travel and entertainment . . . and call it $ 20 million of direct expenses here . i figure that we can make $ 100 million in 2002 with lower var and starting up later in the year . how much of the $ 280 million remaining costs should i expect to be allocated to the west power desk . with an ebit of $ 80 million times 20 % i can sell . if we have another $ 50 million of allocated costs then i can sell this .
i recognize that the potential buyer is unlikely to fund a desk by desk ebit . however , i think that our goal should be to split the pie based on a desk by desk ebit and would like to see a proforma that accomplishes that .
proposed retention structure for three people in portland
a dollar amount paid in cash over one year and equity over two years . price tag tbd .
create certainty around the bonus / retention payments .
indemnify against payback of deferred comp .
clarify total retention dollars for the rest of the desk .
15 % of gross margin for 2002 . 20 % of ebit going forward .
other gripes
labor has not been invited to the negotiating table .
labor doesn ' t get to see the pro forma .
we are supposed to get paid based on ebit yet i have no control over the expense side or the allocation side .
labor is getting accused of holding up a deal that labor had no part in negotiating .
labor is the most important driver of the value of this deal and doesn ' t appear to have any rights other than to accept or reject a poorly defined structure .
i want to make this thing work . i am not trying to be greedy . i am finding it very difficult to navigate through this process given the very limited information that i have been given .
tim