The effect of M&As on benefit plans–What inquiring acquirers need to know.
After a lull in mergers and acquisitions (M&A) activity during the early part of this decade, deal making has erupted once again. On just one day in July, the Wall Street Journal discussed no fewer than six pending corporate actions including: the Sprint-Nextel merger, Federated Department Stores’ takeover of May Department Stores, and Blackstone Groups decision to buy four theme parks from Lego System AS. All of these M&A transactions represent a different type of corporate reorganization. Those differences require benefit professionals to approach the transaction with different goals and issues in mind.
In a traditional M&A, one of the organizations is the surviving legal corporation and the acquired organization ceases to exist as a separate entity. The goal of some traditional transactions is to achieve a true merger of equals. In these situations, the integration team is charged with identifying best practices and developing new plans and systems that best support the synergies and business goals created by the new organization. However, more often one of the organizations is the clear acquirer and the major goal is to integrate the acquired organizations employees and plans into those of the acquirer as quickly as possible.
The acquirer assumes the acquireds benefit programs and systems essentially in tact. While the acquirer may want to integrate the benefit plans and administration systems quickly to achieve cost savings and ease administration, the traditional acquisition generally gives the acquirer leeway to approach integration in a reasonable timeframe. For example, one can integrate at thechange of plan years to facilitate administration, compliance, and open enrollment cycles. Plans subject to nondiscrimination testing can take advantage of the acquisition exemption that provides at least 12 months to undertake major changes. Because the acquired companys system remains in tact, the integration can occur at a predictable date–not the date of the corporate action, which remains an educated guess until it actually happens.
Spin-offs and Divestitures
Spin-offs and divestitures can look a great deal like acquisitions, especially if one firm is selling one of its business units to another enterprise. Whether the divested unit will become part of another organization, a stand-alone entity, or a joint venture, these corporate actions cause unique benefit integration issues.
Participation under the prior parents’ plans may need to cease immediately as of the date of sale. This is particularly true of qualified plans and stock-based programs. When a spin-off or divestiture is part of a joint venture, the IRS generally permits continued participation in the prior parents plans for a limited period. However, the absence of a joint venture makes it critical to have successor plans ready to roll as of the date of sale. The fact that new plans must exist as of the sale date also makes the need to address participant communication and election issues associated with benefit plan transition more immediate.
It is difficult to quickly set up new administration systems. Parties generally negotiate with the prior parent to continue using its payroll, HR, and benefits administration systems for a period of time.
In any spin-off or divestiture, both parties should work closely together to resolve key questions, such as:
* Who will be responsible for interim plan administration, especially if the seller’s corporate staff (as opposed to an outsourced provider) currently provides those services?
* Will contracts with outsourced providers need to be renegotiated predeal?
* If the new organization wants to change the current plans’ provisions postdeal, will the seller’s systems be able to accommodate the desired changes? If so, at what cost?
* Will the current systems be able to capture employee data at the date of sale and also for the period between date of sale and transition to separate administration systems?
* How will the seller accommodate the increased level of termination/retirement activity under their plans, likely to be generated by the deal?
As you approach any M&A, be sure that you fully understand the structure of the deal. If you are working on a non-traditional transaction, carefully consider the differences between it and a traditional acquisition. It will be necessary to adjust the traditional M&A team structure, templates, and timelines to reflect those differences, paying close attention to the needs of all parties–the buyer, the seller and the employees. Doing so will result in a win-win-win transaction.