Changes that give shareholders more power spark talk of FirstEnergy sale

Lake County News-Herald
April 2, 2004

FirstEnergy Corp. is making changes to give more power to its shareholders that might also make an acquisition of the Akron-based utility more attractive.

The company will not comment on possible mergers or acquisitions, but a number of actions in recent months have raised eyebrows and perpetuated rumors of a possible sale.

In February, FirstEnergy's directors moved to dissolve its "poison pill" defense effective March 31. The measure had been scheduled to expire in November 2007. A poison pill is an anti-takeover measure that makes an acquisition less attractive by increasing costs for the buyer.

At its annual meeting May 18, FirstEnergy shareholders will vote on plans to reduce requirements for "supermajority" voting and to decrease director's terms from three years to one year. In announcing plans to lower its voter approval requirements from 80 percent to two-thirds, FirstEnergy said the change would encourage a buyer to negotiate with shareholders, rather than just the board.

Shorter directors' terms increase a board's accountability to shareholders by making directors easier to remove.

FirstEnergy spokeswoman Ellen Raines said the weakening of takeover defenses was in response to the desires of shareholders. "These are all part of a corporate governance culture," Raines said. "The majority of shareholders today do not want to see those kinds of provisions in the companies they support."

The board also recently moved to enhance severance benefits for Chief Executive Officer Anthony Alexander and other top executives.

The boosts given to the so-called golden parachutes were the result of a normal periodic review "to ensure we remain competitive with our peers," Raines said. "Obviously it is very important we retain top-quality people."

According to Virginia Rosenbaum, senior director of research at the Investor Responsibility Research Center in Washington, there is a growing trend of companies weakening their anti-takeover measures. "Companies have perked up their ears a bit" in response to shareholder demands, Rosenbaum said.

Even so, ditching the poison pill, shortening board terms, weakening supermajority requirements and boosting severance packages all at once could raise red flags. "It's probably a little unusual to do all those," Rosenbaum said. "That is a lot of change in a relatively short period of time."

Some analysts have said they doubt FirstEnergy would be a takeover target because it carries too much debt. But Chicago-based Exelon Corp. and Richmond, Va., based Dominion, which owns East Ohio Gas, have been rumored as possible buyers. Exelon owns operating companies in Illinois and Pennsylvania.

David Burks, an industry analyst with Hilliard Lyons in Louisville, said there have been no major mergers among utilities in recent years, but that doesn't mean there won't be any mergers in the near future. "Sooner or later, the odds are one will take place within the industry simply because it's been so long since there has been one," Burks said. "But it's not as if we're on the verge of a whole round of them taking place."

Even with the extra troubles FirstEnergy has endured over the past few years -- including the loss of production at its Davis Besse nuclear plant and bad publicity from the Aug. 14 blackout -- the $12 billion company has recovered nicely on Wall Street, he said. "Their stock price is within 20-30 cents of a 52-week high, so they're not dealing from a position of weakness," Burks said. "Their stock has rallied and has fared well."