Tag Archives: M&A blog series

Defined benefit (DB) plan considerations for M&As

This blog is the fourth in a series of six that will highlight considerations for and the impact of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

M&A transactions occur regularly and come in a multitude of structures and players. Sometimes they’re simple two-dimensional deals—one buyer, one seller—sometimes they’re multidimensional—multiple buyers and sellers, plus unions, government entities, federal agencies, etc.

Urgency usually is the call of the day. Properly and quickly assessing the deal landscape under a current lens, as well as a forward-looking post-deal lens, can be crucial for the deal to be successful for all involved.

The incidence of defined benefit (DB) pension plans requires separate expertise to be included on the due diligence and post-merger teams. The amount of work involved in this area can usually be quickly assessed by an experienced actuary. It may have little impact on the structure of the deal or it may drive large elements of the deal, significantly impacting the purchase price or killing the deal entirely.

CONSIDERATIONS
Below are a few elements to consider from the buyer’s perspective and some examples of the impact they can have on the deal:

Element Consideration Impact
Discount Rates Can vary significantly depending on different viewpoints and market fluctuations. Can impact annual costs, balance sheet entries, and funded status significantly.
Plan Demographics and Demographic Assumptions Can vary significantly from expectation.

For example, a business might have a pension plan with 10 times the number of plan participants as employees.

Review demographics assumptions used in the valuation compared with experience and critical plan provisions.

This can impact go-forward policies and plan operating requirements.

Key benefit provisions could be undervalued or not valued at all with significant liability underreporting.

Auditors Have varying practices.

For example, some audit teams allow companies to net supplemental employee retirement plan (SERP) liabilities against rabbi trust assets.

Accounting allowances vary significantly between auditors: acceptable to theirs may not be acceptable to yours.
Balance Sheets Only show net amounts. Can mask underlying plan size and corporate impact. Even the slightest movement in plan assets or liabilities can dramatically change balance sheet entries.
Liabilities Withdrawal liability. Can be surprisingly high.
  Management employment contracts. Usually trigger additional liabilities with change-in-control.
Termination liabilities. Buyer should be aware that ERISA or GAAP funded status may not be a good measure of the cost to terminate the plan.
Unpredictable contingent event benefits (UCEBs) that are due to plant shutdown or layoff. Buyer should be aware of these provisions and potential impact to cash funding and expense.
At-risk status. Plans with a low enough funded status will require additional cash contributions, special Pension Benefit Guaranty Corporation (PBGC) valuations and reporting, a potential freeze on benefit accruals, and restrictions on some optional forms of payment.
Funding Onboarding underfunded plan. Can affect entire controlled group executive nonqualified deferred compensation (NQDC) plans and loan covenants.
  Merging an underfunded plan. Can trip funding thresholds in combined plan with amplified effects.
  Synergy-driven plant closings. Can trigger unsought involvement of federal pension oversight agencies and massive accelerations in cash contribution requirements.
  Uncertified plan benefits.

 

Require additional work and perhaps additional liabilities.
  Seller may be obligated for continued, post-close contributions. Who is responsible, especially if agency agreements are in place?
Carryover and prefunding balances (credit balances). Large credit balances may mask upcoming cash contribution requirements.
  Contribution due dates.

 

Can cause surprises. Who pays, who deducts?
  Plans may have existing agreements with the PBGC. May require additional contributions.
  Project plan costs. Significant changes in cost might emerge in near-future years, impacting economics of deal.
Legal Noncompliant plans.

 

Bring significant resource diversions and legal liability.
  Current audits or investigations by the Internal Revenue Service (IRS), PBGC, or U.S. Department of Labor (DOL). May impact legal and financial obligations as well as reputational risks.
  Material claims pending or threatened related to the plans. Same.
Valuations Negotiated benefit increases or cost-of-living adjustments (COLAs) in collective bargaining agreements (CBAs) might not be fully reflected in valuations. Liabilities that are due to current contractual agreements may not be reflected in liability disclosures.

Additional retirement plan considerations include:

• Inventory discovery may lead to undisclosed plans and liabilities
• Carve-outs can spin plans many different ways, affecting future plan/corporate economics
• State of target’s plan administration could bring burdens
• Proper administration support for the pension plans
• In-house pension expertise evaporating on both sides
• Poison pills need valuation and assessment
• Foreign plan issues such as termination indemnities (if any)
• With the elimination of the Internal Revenue Service (IRS) approval process for individually designed qualified retirement plans, it will be important that plan changes going forward do not jeopardize the qualified tax status of the plans, upon random audits from the IRS.

Pension plans can add complexity to a merger or acquisition. It is important to involve an actuary in the process to identify and help mitigate risks.

Health and welfare plan considerations for M&As

This blog post is the third in a series of six that will highlight considerations for and the impacts of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

When considering health and welfare benefit plans as part of a merger or acquisition, remember that the due diligence you complete can impact the purchase price, uncover hidden risks, and be a critical component in the new company’s benefits strategy. Here are three steps you can take up-front to help ensure a smooth transaction and integration.

1. INITIAL DUE DILIGENCE REVIEW
A sound due diligence analysis will allow the buyer to make informative, data-driven decisions. A good analysis identifies items, such as a realistic evaluation of the cost of the health and welfare plan(s) being acquired, the baseline risk profile between the buyer and seller, an understanding of plan administration processes, including reporting and compliance risks, and any hidden risks, such as large claims or pending litigation. Specifically, this analysis should:

  • Assess the seller’s existing compliance documentation and administration
    • Plan documentation, participant notifications, and required notices
    • Collective bargaining agreements
    • Documentation of Internal Revenue Service (IRS) nondiscrimination rules compliance
    • ERISA compliance in accordance with fiduciary, plan administration, and reporting/disclosure rules
  • Identify potential liabilities, such as:
    • Benefit commitments to employees, retirees, bargaining groups, executives, and terminated business units (this may require a review of employment practices as well as formal programs)
    • Vendor relationships—contractual commitments, lawsuits regarding plan administration, and performance-related payments
    • Financial liabilities—post-retirement benefit plans, incurred but not reported (IBNR) claims calculations for health plans, claims liabilities (large claims), and tax/regulatory penalties
    • Other benefits—vacation/sick leave, severance plans
  • Include retiree health commitments and other coverage as promised by seller
    • Duration/extent of commitments and the extent of “vested” benefits as well as the buyer’s ability to amend or terminate the commitments
    • Analysis of whether retiree benefit commitments are fully insured or self-funded
    • Funded status of retiree commitments and coverages
  • Compare benefit plan designs between buyer and seller to assess potential impact of plan design differences and different levels and types of benefits offered by both organizations

2. PLANNING FOR POST-MERGER CONSOLIDATION
After a sound due diligence analysis, it’s important to determine how the benefits for the post-acquisition organization should be structured. An experienced consultant can help guide you through the evaluation process, developing solutions that fit the requirements of the new company. Here are some things to consider as you optimize your new company benefits strategy:

  • How do the workforce requirements and employee demographics vary?
  • How large is the gap between the two organizations’ benefit programs (considering plan design, cost variations, vendor differences, etc.)?
  • How different are the two company cultures and how do the benefit plans reflect those cultures?
  • To what degree should benefit design and administration vary across subsidiaries or business lines?
  • Should benefit plan administration be outsourced, co-sourced, or handled internally?

3. MANAGING THE MERGED ORGANIZATION
Once the deal closes, it’s time to look to the future and execute an optimized benefits strategy for the new company. Depending on the business decisions considered above, the buyer may steer toward a particular future benefits strategy for the combined company. Below are two possible benefits strategies and considerations for each.

  • Maintain separate plans: In a decentralized organization with multiple business units, this may be the preferred approach. It will be important to evaluate the impact of the controlled group rules when setting up the compliance strategy in this situation. A thorough review of all plan documents, contracts, and practices will be key to determine if plan amendments or other changes will be necessary. Division of responsibilities between the buyer and seller with respect to contributions, reporting, and administrative duties relating to the current plan year and the preceding plan year will need to be determined. The buyer will need to consider whether it wants to take the responsibility for the prior operation of a plan. This would include any penalties from prior violations, including minimum funding rules, reporting and disclosure rules, compliance with ERISA, etc.
  • Integrate plans—terminate seller’s plan and integrate seller’s employees into buyer’s plan: This strategy provides for the most cohesiveness and integration among all employees involved. It allows for greater leverage with vendor negotiations. Consideration should be given to “right to change” or “termination of benefits” provisions within the seller’s existing medical benefits program (e.g., retiree medical benefits). Consolidation of vendors could be a major task. Lastly, consideration must be given for midyear plan changes and whether they will prompt items such as termination penalties and runoff termination liabilities. Overall, there are many health and welfare factors to be considered in an M&A transaction. To the extent these health and welfare factors create a liability to the buyer, it should decrease the purchase price. Similarly, if these factors represent a hidden asset of the seller, an increased purchase price may be appropriate.

DC plan considerations for M&As

This blog post is the second in a series of six that will highlight considerations for and the impacts of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

Buyers and sellers alike face a number of issues, oftentimes complex, leading up to and following a corporate merger or acquisition. If both entities are sponsors of a defined contribution (DC) plan, many decisions have to be taken into account and given adequate consideration. When possible, the future of the plans involved should be decided before the transaction because options are limited afterward. Be sure to have a game plan in place to complete DC plan due diligence before closing.

There are generally two types of acquisitions—an asset purchase or a stock purchase. The choices associated with them have significantly different impacts to plan participants. Here’s a look at each.

ASSET PURCHASE CONSIDERATIONS
With an asset purchase, a buyer is only “buying” the assets or a portion of the assets of the seller. The buyer will generally not have the responsibility for the seller’s DC plan. That means any employee who is hired by the buyer would simply be terminated by the seller and receive any distribution option available under the seller’s plan. The seller, and for that matter the DC plan, would continue to remain in existence. (Note: This often results in a partial plan termination in which all affected participants must be given 100% vesting.)

STOCK PURCHASE OPTIONS
If the transaction is a stock purchase, the buyer can choose several options: maintain the seller’s plan, terminate the seller’s plan, or merge the two plans. Here’s a look at the implications of each.

1. Seller’s plan is maintained
If the decision is to maintain the seller’s DC plan, several issues need to be considered:

  • What is the additional cost for the maintenance of and reporting on two separate plans?
  • Will there be participants in each plan or will one plan be “frozen” and one plan “active”?
    • If both plans are active, how will transfers between the two groups be handled?
    • Will the benefits offered between the two plans be the same or different? If different, how will the differences be communicated?
    • What are the nondiscrimination testing implications?

2. Seller’s plan is terminated
The decision to terminate the seller’s plan must take place before the closing of the transaction—otherwise, the buyer assumes responsibility for the seller’s DC plan. Before terminating the plan, consider:

  • Are there outstanding participant loan balances that could default?
  • Who will be responsible for the final audit and 5500 reporting?
  • Will there be a need to identify and locate “lost” participants?
  • Will rollovers into the buyer’s plan be allowed?
  • Will loan rollovers into the buyer’s plan be permitted?

3. Seller’s plan is merged into buyer’s plan
When considering whether to merge the two DC plans, it’s important to complete due diligence before the transaction to prevent issues after the transaction. Review operational issues and address them up-front. If compliance issues are uncovered, review options to determine if remedies exist under the Employee Plans Compliance Resolution System (EPCRS). Then complete a side-by-side review of the design of each plan to compare plan designs. A final plan design incorporates the best of both plans and is a win-win for all participants. Be sure to:

  • Analyze participation levels of the new, larger group and determine whether the merged plan will pass or fail nondiscrimination testing
  • Consider the effective date of the “merged” plan—take into account January 1 dates if safe harbor plan status is needed
  • Determine if participants should be automatically enrolled, if deferral rates should be mapped over, or if reenrollment should be offered
  • Review investment options to determine any fund additions or replacements, finalize the asset mapping strategy, and decide if the merged participants will be defaulted
  • Identify any protected benefits
  • Create comprehensive participant communication
  • Determine how to handle Roth assets of the seller’s plan if the buyer’s plan does not have a Roth provision

BEFORE, DURING, AND AFTER THE TRANSACTION
An abundance of due diligence, careful analysis, and a detailed project plan is paramount. The impact, both to the corporation and the employees, is considerable. Well-informed choices and decisions can go a long way in making the transition a smooth one for all involved.

Employee benefit plan considerations for M&As

This blog is the first in a series of six that will highlight considerations for and impact of employee benefit plans on mergers and acquisitions (M&A) transactions. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

Seventy-five percent of U.S. employers in the 2017 Global Capital Confidence Barometer survey say they plan to pursue M&A deals in the next 12 months.

This follows a year that saw a number of large transactions—AT&T and Time Warner for $84 billion, Bayer’s acquisition of Monsanto for $66 billion, and the merger of Sunoco Logistics Partners and Energy Transfer Partners in a $21 billion all-stock deal.

No matter whether it’s a billion-dollar transaction or something much, much smaller, employee benefit plans are a critical component of the deal. They can impact the purchase or sale price, and create both financial and compliance risks if comprehensive due diligence is not completed.

The following tips will be helpful as you consider the employee benefits component of the deal—no matter which side of the table you’re on.

1. UNDERSTAND THE RISKS
Due diligence is a critical first step in a merger or acquisition transaction. Because the new entity (buyer or merged organization) is generally responsible for the employee benefit plans, including liabilities, it’s important to have a clear and complete picture of the plans and any associated risks before the deal is closed.

Don’t rely on the seller’s representation of the condition of the benefit plans. Market conditions may have changed since the plans were valued—including changes in asset performance and market interest rates. There may be unfunded pension liabilities, tax penalties that are due to noncompliance, or even potential lawsuits because of nondisclosed but promised retiree benefits. They all can impact the purchase price and the deal negotiation.

Be sure to get your employee benefits consultant, plan actuary, and recordkeeper involved early in the due diligence phase. If you wait to think about benefits until after closing, it’s too late. The deal is done—and you may have unintentionally acquired some risk, and without proper adjustments to the purchase price

In addition, appropriate, well-timed communication is critical to talent management—the most critical asset in the deal. Retention of key management is sensitive and important. Communicating the strategic vision and benefits of the transaction to employees is a key component to the success of any transaction.

2. PUT IT IN PERSPECTIVE
As you consider the impact of benefit plans on the transaction, also take into account how the type of deal—asset or stock—can impact the buyer’s or seller’s perspective. See the chart below for a high-level overview.

3. ASK GOOD QUESTIONS
Finally, don’t wait until after closing to develop a game plan for integration. Ask questions. Consider options. Dig into the details.

For example:

• Will you terminate, spin off, merge, or go with stand-alone compensation and benefit plans?
• How will you map investments?
• Will you reenroll current employees? Auto-enroll new employees?
• Are there union issues?
• How will you handle vesting and loans?
• What’s the impact of current legal or regulatory activity?
• How do the employee demographics differ?
• How do the two cultures fit?
• Which benefit plans and features best fit the new company strategy and its employees?
• What should the new executive and broad-based compensation programs look like?
• What acquired employees are critical to retain?
• What communication and programs need to be in place to retain key talent?

All are good questions—and how you answer them can impact the transaction and potentially the sale price. Know the answers up-front and you can mitigate risk and ease the transition.