Kelley Gets 1.1M Reasons to Stay

McData is willing to put up nearly $4 million to make sure CEO John Kelley and five other executives stick around until the Brocade deal closes.

Under terms of a retention plan McData disclosed today in a SEC filing, Kelley will receive more than $1.1 million if he remains with the company through completion of the acquisition. COO Todd Oseth is eligible for $740,000, CFO Scott Berman $568,750, engineering senior VP Michael Frendo $495,000, chief legal officer Thomas McGimpsey $495,000, and sales SVP Adrian Jones $410,000.

Brocade disclosed Aug. 8 that it planned to acquire its Fibre Channel switch rival in a stock deal worth $713 million. Brocade has said it expects the deal to close by the end of January. (See Brocade Bags McData For $713M.)

With closing a good three months away, financial analysts believe the retention package is an attempt by the companies to assure McData customers and shareholders of the two firms that there will be an orderly transition.

"This means Brocade thinks they need these six guys to pull off the merger," says an insider with knowledge of the two companies. "They're saying 'Hey, don't get a job just yet,' and they're offering to make it worth their while to wait before finding a new job."The execs will get half of their retention package at the close and the rest six months after they leave Brocade. The filing says the executives must be willing to "extend their employment with Brocade beyond the effective time of the merger." Brocade has not agreed to retain any of them yet, although a company spokesman today said it expects to offer Kelley a consulting deal.

"However, no such agreement exists at this time," the spokesman says. "Regarding the other employees, Brocade is still in the integration planning phase. We generally do not comment on specific employment matters."

Brocade forecasts about $100 million in annual synergies from the deal, leading to speculation that many of McData's 1,400 employees will not be retained.

A buyside financial analyst says it's common for acquisition targets to offer a retention plan if there's a long time between the deal's announcement and its close.

"It's to create a comfort level for shareholders and customers," he says. "The last thing in the world you would want to happen is for the executive team to quit early. Imagine if the government didn't allow this deal to go forward and the executive team quit. They want to make it clear that the sales force and execs aren't fleeing the company."Although the retention plan was put in place in August, McData waited until today to announce it. The buyside analyst says the timing might have to do with speculation that McData's revenue has dropped more sharply than either company anticipated.

"Sources believe various dynamics resulting from the proposed alliance between Brocade and McData have significantly hindered business at McData," RBC Capital analyst Tom Curlin wrote this week in a note to clients. "More specifically, supply chain slowdowns, and distracted and/or departing sales resources lead us to believe that McData's performance in the quarter is tracking well below expectations."

Brocade also announced last week that the Federal Trade Commission (FTC) requested additional information for its review of the deal under the Hart-Scott-Rodino antitrust act, adding it did not expect that to delay the close. (See Brocade Files S4.)

The retention plan isn't the first move made to assure customers and shareholders. On Sept. 12, Brocade took a full-page ad in the Wall Street Journal as an open letter telling customers it would continue to sell and support McData products after the close. McData customers said they were concerned ongoing support by Brocade after the deal was announced. (See Users Ponder Life Under Brocade.)

Dave Raffo, News Editor, Byte and Switch