The 'I Must Do a Merger' Bonus

April 6, 2004; Page C1

Want a bonus? Acquire a company.

That's the unusual deal that directors of Juniper Networks Inc. gave to Chief Executive Scott Kriens. According to filings with the Securities and Exchange Commission, Mr. Kriens's bonus for this year is dependent on Juniper's "entry into new businesses by means of acquisitions." The board is serious: Without an acquisition, no Juniper executive will get a bonus, according to the filings.

They don't need to worry. On Feb. 9, Juniper, a Sunnyvale, Calif., maker of Internet-switching gear, said it plans to acquire security-technology specialist Netscreen Technologies Inc., also of Sunnyvale, for $3.6 billion in stock. Completing the Netscreen deal, expected later this month, will satisfy the acquisition requirement, the filings say.

Compensation experts say they can't recall a similar bonus provision, which seems to reward Mr. Kriens for striking the Netscreen deal without regard to how well the companies are integrated or the combined Juniper performs. It's more common, they say, for executives to be rewarded with large bonuses after completing the integration from a big merger. For example, William B. Harrison Jr., chief executive of J.P. Morgan Chase & Co., received a $10 million bonus, and restricted stock, in 2001 after overseeing the merger of J.P. Morgan & Co. and Chase Manhattan Corp.

The Juniper provision troubles some analysts and shareholder advocates, who say it could spur ill-considered acquisitions, similar to the way bonuses tied to revenue growth or share prices seemed to encourage questionable accounting during the tech-stock boom.

"You don't want to encourage impulse buying," says Patrick McGurn, a senior vice president of Institutional Shareholder Services, a Rockville, Md., proxy-advisory firm. "A lot of deals don't work out, and you want to make sure the CEO is focused on deals that work out for the company and not just getting deals done."

Through a spokeswoman, Mr. Kriens declined to comment.

Randi Paikoff Feigin, Juniper's director of investor relations, says the bonus provision didn't influence Juniper's decision to acquire Netscreen. Juniper wants Netscreen, whose offices are virtually across the street, to strengthen its security offerings and to expand sales to businesses. Until now, Juniper, a rival to Cisco Systems Inc., has sold almost exclusively to telecommunications networks. "We didn't do the deal just to do the deal and hit the goal," she says.

Ms. Feigin says Mr. Kriens has far more to lose by a decline in Juniper's stock than he stands to gain from the bonus. The filings don't disclose Mr. Kriens's potential bonus for this year; last year it was $275,000, matching his salary. By comparison, Mr. Kriens owns roughly 17.2 million Juniper shares (a 4.6% stake that makes him the company's largest individual shareholder), according to the company's most recent proxy statement. So even a small drop in the stock price would more than wipe out any bonus.

Juniper's compensation committee has two members: venture capitalists Vinod Khosla and William Stensrud. Mr. Khosla declined to comment. Mr. Stensrud didn't return calls.

Ms. Feigin says the acquisition goal is part of a broader effort by directors to encourage growth. Other bonus provisions reward Juniper executives for "expanding market opportunities" internally and through partnerships.

Ms. Feigin says the board first included an acquisition goal in last year's bonus plan. Juniper didn't make any significant acquisitions last year, so the board upped the ante, making acquisitions a requirement for any bonuses this year.

Historically, Juniper has made few acquisitions, particularly in comparison with Cisco, which acquired dozens of young technology companies in the 1990s, including StrataCom Inc., which had been co-founded by Mr. Kriens. By contrast, Mr. Kriens, who has been CEO of Juniper since shortly after the company was founded in 1996, stressed the virtue of focusing on a single product line, routers that direct computer traffic across the Internet.

Juniper ultimately branched out, with mixed results. Its 2001 acquisition of Pacific Broadband Communications, a closely held maker of equipment for cable-television systems, achieved little. But analysts consider Juniper's 2002 acquisition of the Unisphere Networks Inc. unit of Siemens AG a big success, helping to broaden Juniper's offerings and boosting sales overseas through cooperation with Siemens.

Ms. Feigin says Juniper has been "methodical" about acquisitions. SEC filings show Juniper and Netscreen first discussed an acquisition in August 2003. Talks broke off in October, then resumed in late January, just a few weeks before the deal was announced.

Some compensation experts say the bonus provision is a reasonable way for the board to encourage managers to think more aggressively about growth. If Juniper wants to grow, the board should be "directing those efforts of management," says Judy Fischer, managing director of the Executive Compensation Resources unit of Towers Perrin, a human-resources consulting firm.

Indeed, some shareholders and analysts find the bonus provision revealing because it shows the board is concerned about Juniper's growth prospects. Juniper grew explosively in the late 1990s, but was hit hard by the downturn in tech and telecom. Revenue last year, at $701 million, remained lower than in 2001.

But investors still value Juniper as a fast-growth stock. At $27.52 apiece on the Nasdaq Stock Market, Juniper shares trade at 73 times this year's expected earnings; Cisco, by comparison, trades at 34 times this year's expected earnings.

The bonus provision "clearly signifies that the board has been concerned about their growth opportunities," says Doug MacKay, a portfolio manager at Oak Associates Ltd., which owned 20 million Juniper shares at the end of last year, making it Juniper's third-largest institutional shareholder. Mr. MacKay says Oak has been paring its Juniper stake because of concerns about the rich valuation. He likes the Netscreen deal because he thinks it will spur growth and add to earnings, though he says the bonus provision is "peculiar."

Ms. Feigin says Juniper's board is comfortable with the growth of its core business, "but we have high expectations and want more."

Write to Scott Thurm at