A Good Deal Too Much

Conseco's plan to align the interests of managers and shareholders has an alarming downside.

By all rights, Rollin Dick should be contemplating a comfortable retirement about now. During much of his 14-year career at Conseco Inc., the 68-year-old CFO helped the fast-growing insurer achieve celebrity status on Wall Street. Together with CEO Stephen Hilbert, Dick steered the Carmel, Indiana-based company through a blitz of acquisitions that fashioned $8.3 billion Conseco from a host of smaller, independent insurance companies. For his efforts, he collected the usual rewards: a fat salary, multi-million-dollar bonuses, and generous stock option grants. To these, add one more thing that Dick had not counted on: crushing personal debt stemming from a management incentive program gone badly awry.

Dick’s rueful experience supplies a cautionary tale for executives who dream about lavish equity stakes in their high-flying companies. Along with fellow Conseco executives who became millionaires in headier days, Dick leaped at an opportunity that seemed too good to refuse. Already a large holder of Conseco stock, he embraced the company’s offer to guarantee bank loans used to purchase still more stock.

With Conseco stock trading far below the purchase price, it is fair to say that managers have never had a steeper stake in boosting the price of Conseco shares. Without a dramatic price increase, these executives have no hope of realizing any gains. At this point, in fact, a modest loss may be too much to wish for. All told, Conseco executives and directors have borrowed approximately $600 million to purchase shares of Conseco stock now worth only $295 million. Dick alone, based on his 1998 proxy filings, owes about $30 million more than the current value of his shares.

In 1996, when Conseco adopted the scheme, borrowing to buy stock seemed like a great idea. Bank of America provided the funds to senior managers and directors; Conseco guaranteed repayment and covered the interest payments with personal loans to executives. The climate was inviting. After battling skeptics and short-sellers, who saw no future for a collection of no-name life and health insurance firms, Hilbert stood on the verge of vindication. Far from stumbling, Conseco’s cash flow and stock price surged.

Flush with success in 1994, Hilbert took aim at venerable Kemper Financial Services, with its attractive portfolio of insurance products and mutual funds. Investors nervous about the lofty price tag punished Conseco’s stock price, and Kemper ended up in the hands of Zurich Group. Afterwards, Conseco stock resumed its upward momentum.

Green Tree Snag In the first two years of the loan program, insiders bought 8.5 million of Conseco’s shares, which tripled in price during that period. A snag developed, however, on April 6, 1998, when Hilbert announced his intentions to purchase St. Paul, Minnesota-based Green Tree Financial Corp., a consumer finance company specializing in lending to owners of manufactured houses. One day after they nudged Conseco’s stock to a record $58, investors gave the transaction a thumbs down. Conseco’s stock price immediately slipped by 15 percent. Doubts centered on the difference between Green Tree and previous acquisitions, which relied largely on cutting costs and streamlining operations. Green Tree offered no such consolidation gains. For its investment in Green Tree to pay off, Conseco would have to become adept at cross-selling financial products to its combined customer base, a tricky strategy in the fiercely competitive financial services industry. Moreover, the quality of Green Tree’s earnings was in question because of the company’s aggressive accounting practices.


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