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Severance benefits cause friction in Microchip/Atmel merger

Posted: 12 Apr 2016 ?? ?Print Version ?Bookmark and Share

Keywords:merger? microchip? atmel? OEM? severance benefits?

Atmel has been on the hot seat for at least a year with bids from Dialog, Cypress and Microchip. It accepted a $4.6 billion bid from Dialog in September, then rejected the bid and accepted on January 15 a bid from Microchip of $8.15 per share estimated at $3.8 billion.

During that time Atmel management sent employees three letters promising a severance package in case of a merger. Such offers are widely used to retain employees when companies engage in merger talks.

A July 9 letter promised severance of up to 50% of annual base pay, up to six months COBRA insurance paid by the company as well as a pro-rated part of any regular annual bonus. The July letter said the offer would expire on November 15 if the company was not acquired. Managers got a separate letter promising accelerated 100% vesting of restricted stock units (RSUs).

On January 14, Atmel sent employees a letter reminding them the July severance package "continues to remain in place." In a separate FAQ, Atmel said, "Microchip has agreed to honor each of your employment and compensatory contracts (including retention awards and employment, employment continuation, severance, incentive and change in control agreements) with Atmel, or its subsidiaries, that are in effect immediately prior to the closing of the transaction."

Expiration clause

Figure 2: Microchip claims this expiration clause invalidates an Atmel severance package.

In an interview with EE Times, Sanghi said Atmel had several severance agreements in place, most of which Microchip has honored, including one for vice presidents "we have honored with every executive terminated so far."

A separate promise to accelerate equity acceleration for four years for all 176 of Atmel's directors was "unprecedented," he said. "Out of 17 companies we've acquired, we have never seen director equity acceleration at this rate, the best you can find is acceleration for three or four monthsit was not conditional to any date so we are honuring it, it's extremely expensive but we are honouring it," he said.

The agreement to pay upon severance a fraction of annual salaries and bonuses for directors and all other employees "is the one governed by the July 9 letter," said Sanghi.

"It was conditional to a definitive [merger] agreement by November 1. It was signed by Dialog, but Atmel canceled that deal. Every lawyer who has seen it so far said the July 9 letter has expired," he said.

"Atmel implied to employees through the January 14 letter the benefits were still in place, but Microchip had not signed a deal until January 19," he said. "Atmel needed to have a board resolution of their own [extending the severance plan] and provide it to us and based on the extra cost we could have lowered our price to acquire Atmel," Sanghi said.

The Microchip board had lawyers at the Atmel employee meeting in San Jose who "said the company had no obligation [to honour that severance package] and would win in the court," Sanghi said. But "I told the board we don't need to win this in the court we need to win it in the hearts of the employees," he said.

Thus Sanghi proposed and the Microchip board accepted that it would pay half the cash and bonus severance Atmel offered. Sanghi and Moorty agreed to take a 50% pay cut for a quarter as part of the deal.

"That's affective todayI took a bullet for the employees of Atmel two days after they were my employees," Sanghi said. "We're not the bad guys or a bad company, it was a terrible situation where [Atmel employees] were led to understand something without letting us take this into consideration in our offering price, so we are making a personal sacrifice to appeal to employees," he added.

"I received lots of letters from employees of Atmel applauding our sacrifice," said Sanghi.

All 10 of the top executives of Atmel were laid off and Atmel's chief executive retired the day the merger closed. No more than half a dozen other employees were laid off before Microchip made its offer to give half of Atmel's promised severance.

"I am willing to extend them the same thing to resolve the matter," Sanghi said. "Some people are bitter, you always have 1-2% of people looking for fights, but this is not a bad company," he added.

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