Handling Benefits in an M&A or IPO Deal

Benefit decisions are front and center as companies restructure

By Joanne Sammer Feb 25, 2016
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Employee benefit issues may not be at the top of the agenda before, during and after a major transaction—a merger and acquisition (M&A) or initial public offering (IPO)—but handling benefits-related challenges is vital to a successful transition.

Defined benefit pension liabilities, retiree medical program liabilities, the Affordable Care Act and other benefit compliance issues are some of the most significant financial risks that can be uncovered during diligence. 

On the strategic side, benefit levels can be a major decision point when it comes to how to treat a newly restructured company. On the tactical side, moving tens, hundreds or thousands of new people onto existing or revised systems will have long-lasting ramifications.

Together or Separate?

The top strategic questions companies face during an M&A transaction include how rich benefits should be for the combined entity and whether one company’s benefits prevail over the other’s.

These issues loomed large for an insurance company we’ll call “BigCo,” which recently acquired several home health care-related businesses. “The question was whether to move the employees from the acquired businesses into the current company structure or do something different,” said Dave Kompare, principal and senior vice president at Aon Hewitt in Lincolnshire, Ill., who advised the client, which he preferred not to name.

In general, Kompare explained, the acquired businesses had employee benefit offerings that represented a much smaller percentage of payroll than BigCo’s benefit program. While BigCo offered benefits worth 25 to 30 percent of payroll, the trend among the home health care agencies it was targeting for acquisition was much lower, at 17 to 18 percent of payroll. So if it offered employees of these acquired companies a richer benefits package, BigCo would essentially be increasing the cost of that acquisition.

“Home health care generally has a lower benefits profile as an industry,” Kompare said. By modifying its existing benefits structure to allow for a lower level of benefits, BigCo would be able to put together a benefits package that was less valuable than it traditionally offered but that was acceptable and competitive to employees in that industry segment.

Maintaining different benefit packages or levels may not work for every company, though. Simplicity and administrative ease are key reasons why some organizations adopt a single benefits structure and strategy for all employees. In a merger or acquisition where the newly combined company is fully integrated, this approach makes the most sense. That’s why many larger organizations, particularly those engaging in a lot of acquisition activity, maintain a single benefits platform for all operations and simply bring new employees onto that platform after acquisitions.

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Maintaining different benefit packages or levels
may not work for every company.

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Before and after an IPO, a newly public company may want to expand its employee benefit offerings to be more competitive in the market and to meet long-term employee retention goals. “Companies can strengthen the benefit program heading up to the IPO,” said Jeff Weber, senior vice president of HR for Instructure, a learning management company based in Salt Lake City. Once formerly cash-strapped private companies have access to capital as a newly public company, that’s the time to improve benefits by adding programs to make the package more competitive, for example by “increasing contributions to medical benefits if the company did not have a strong contribution before,” said Weber.

Post-Deal Workforce Management

Bringing all employees onto a single benefits system or platform usually eases administrative cost and complexity. It also has implications for workforce management. “Moving some talented people from one part of the business to another can be a challenge if those parts of the business have different benefit profiles,” said Kompare. For example, “one part of the business might have a defined benefit pension plan while another part does not.” In that situation, the key question is whether employees are willing to give up any extra benefits to make that move, perhaps in exchange for greater career advancement prospects.

In addition, having only one or only a few retirement plans can ease nondiscrimination testing and reduce the overhead associated with running multiple plans. Multiple smaller 401(k) plans, for example, may not attract enough contributions from lower-paid employees to meet nondiscrimination thresholds. This is such an issue for some companies that “they are almost forced to transition employees over to a single plan,” said Kompare.

These tactical questions will be completely different if the merger or acquisition involves a global entity. Depending on the jurisdictions involved, employers may have no choice but to maintain legacy benefit plans for employees in specific countries or locations. “There are a lot of hoops to jump through just to move people onto payroll,” said Jeannie Leahy, a partner with law firm Ivins, Phillips & Barker in Los Altos, Calif. “The U.S. is the easiest place to do that but then it gets harder and harder as you move into other jurisdictions.”

Address Employee Concerns

No matter how companies handle employee benefits after a major transaction, keeping the lines of communication open about these matters is crucial. “Employees are often concerned first about whether they will continue to have a job and second about how these changes will impact their pay,” said Leahy. “But they also want to feel comfortable that their 401(k) match and medical premiums and co-pays are going to be the same.”

Pensions Obligations Are Key Factor

In an M&A deal, almost half of all buyers are willing to take on pension and post-retiree medical obligations, according to the March 2016 People Risks in M&A Transactions report from HR consultancy Mercer. But a buyer’s willingness to assume pension obligations is heavily influenced by pension risk-management opportunities.

“Sellers with defined benefit obligations can help potential bidders understand the available risk management solutions and can reduce pension volatility that can occur during the sale process,” noted Doug Johnson, a partner in Mercer’s Toronto office.

Sellers choosing to divest assets that include defined benefit pension and other long-term employee obligations must navigate pension volatility during the auction process. “This risk is evident in the turbulent equity markets witnessed at the start of 2016 as many U.S. pension funds lost roughly 10 percent of the value of their equity portfolios in the first few weeks of the year,” Mercer’s report noted.

Joanne Sammer is a New Jersey-based business and financial writer.

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