Vishay Intertechnology to pay $60 million to its founder

Felix Zandman will be paid $60 million for his intellectual property contributions to the company he founded in 1962, electronic component maker Vishay Intertechnology Inc. of Malvern. (David Swanson / Staff Photographer)

Depending on how you look at it, the founder of Vishay Intertechnology Inc. either saved his company $310 million to $385 million or will cost it $60 million over the next five years.

It all turns on a provision in the previous employment agreement of Felix Zandman. Vishay had wanted to make sure he’d be compensated in the event of termination, because of the intellectual property he has contributed since founding the Malvern electronic-components maker 47 years ago.

But I might call it a “legacy cost.” Certainly, it’s different from the burdens of health-care and other benefits promised workers that have contributed to the restructuring of the U.S. steel and auto industries.

However, this promise, made 24 years ago, is also costly and certainly became a concern to Vishay.

The story of Felix Zandman is a compelling one.

Born in Poland in 1927 and a survivor of the Holocaust, he emigrated to the United States in 1956 and became director of research at the Budd Co. in Philadelphia. In 1962, he started Vishay, creating and developing many of the core technologies that it eventually used in its products, such as resistors. Today, it is one of the dominant companies in its sector.

In its most recent Form 10-K, Vishay estimates that $1.7 billion of its $2.8 billion in 2008 sales could be attributed directly to Zandman’s inventions.

Zandman’s previous employment agreement with Vishay called for him to receive royalty payments on those sales for 10 years following his termination for certain reasons.

The agreement would have paid him 5 percent of the gross sales of those products. In 2007, Vishay hired a consultant to evaluate how much that might cost the company. The “present value” of the royalty was estimated to be between $370 million and $445 million had he been terminated as of Dec. 31.

“The possible consequences of this contingent liability for potential strategic alternatives available to the Company were deemed of particular concern at this time in light of the unprecedented disruption now being experienced in the global markets,” states a supplement to Vishay’s proxy statement filed with the Securities and Exchange Commission.

And perhaps the wide ramifications of the royalty deal could not have been foreseen when it was included Zandman’s original employment agreement signed in March 1985, when Vishay’s sales were $56.5 million.

In December, Zandman approached Vishay’s compensation committee with a proposal to restate his employment agreement, according to the filing. This week, they agreed to drop the royalty payments in exchange for paying the founder $60 million over the next five years.

Vishay paid Zandman $10 million on Wednesday. Subsequent $10 million payments will be made each year on the same date.

Zandman would not receive any additional payments if he were to terminate his employment “without good reason” or if he were terminated “for cause,” the filing states.

And while no one can deny his substantial accomplishments as an inventor and entrepreneur, there’s bound to be some grumbling from shareholders about the additional payment at the annual meeting on May 26.

Like many technology companies, Vishay got smacked by the global recession in 2008. It lost $1.73 billion, or $9.29 per share, last year, compared with net income of $130.8 million, or 69 cents per share, in 2007.

Investors who saw their Vishay shares fall 45 percent over the last year may not be in a nostalgic mood.