Tag Archives: merger and acquisition

International M&A deals can benefit from independent actuarial valuations

A Milliman client, a global information technology (IT) company, acquired an operation in Spain. Along with the acquisition came the operation’s local retirement program, with its associated assets and liabilities, including a defined benefit (DB) pension obligation.

As part of the acquisition process, an actuary—appointed by the seller—carried out an actuarial valuation of the existing local retirement liability. Not long after the acquisition, the company asked Milliman to carry out the actuarial valuations for accounting purposes, covering operations in several countries.

To read more about the work Milliman did—and to learn why expert international actuarial advice is so important for successful global M&A deals—see Dominic Clark’s article here.

Due diligence helps company win acquisition bid

Milliman recently assisted a leading provider of institutional investment products and services in determining whether to make a bid to acquire another organization. This organization provides related, but differentiated, information and analytics to institutional investment consultants, asset owners, and managers.

The acquiring firm needed information regarding the institutional investment industry and potential growth opportunities for the target’s offerings.

In this study, Jeffrey Nipp explains how Milliman helped in evaluating these opportunities and discusses the bid’s outcome.

Due diligence reduces pension plan’s purchase price

A Milliman client was considering an acquisition. But first, it needed to review the target’s single-employer defined benefit pension plan. On the client’s behalf, the firm reviewed the target’s latest pension valuation report and five-year projections to make a determination. Would this potential acquisition—and its pension plan—fit in with the client?

Consultant Bret Linton explains in more detail the work that Milliman did and what it meant for the client’s bottom line in his article “Mergers & acquisitions: Pension plan due diligence.”

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.

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.)

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

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.

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.

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.

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.

Retirement plan merger woes

A small handful of individual companies decide to merge; as part of that merger, they decide to also merge their retirement plans. Seems easy enough, right?

We all too frequently run into companies that have decided to sell or merge without considering the effects on their retirement plans. Merging multiple retirement plans can be great for administrative purposes. However, more often than not a merger results in an enormous consulting project and plan design change. Sponsors should be aware of the complexity before they make the decision to merge.

First and foremost, sponsors should be aware of the deadline to merge the plans. The transition period ends on the last day of the first plan year beginning after the date of the change, provided all involved plans satisfy two conditions. They must be able to pass coverage as of the day before the acquisition and there must not be any significant change in coverage, other than any change directly resulting from the acquisition, or a significant reduction in the benefit provided.

Who will stay, who will go? If all of the involved companies had retirement plans going into the merger, which of the recordkeepers or investment advisors will continue on after the merger? Or will the new company go out to bid and need to take time to sort through proposals and presentations of prospectuses? All of this will take time and needs to be accounted for while laying out a timeline to stay on track for the end of the transition period. Likely issues to consider include:

• Is termination of an existing plan a possibility, either before or after two companies merge? If so, it would make sense to hold off on merging these plans into a consolidated plan until a decision can be made.
• After the companies merge, who will be the key decision makers? There is a risk of too many cooks in the kitchen. Say that you have six companies that merge and each company has a team of three people who previously participated in making decisions. That means 18 people with 18 different personalities and opinions will have to understand and be appeased before any final decisions can be made.
• Once a decision to hire/retain a recordkeeper and investment advisor has been made, a consultant will need a fine-toothed comb to go through the current plan documents for all parties, determining protected benefits that must not be eliminated or reduced and creating a new plan design.
• The consultant and the employer must take into consideration the goals of the plan and the demographics of the participants in order to determine what the optimal plan design will be for the new employer. The best plan design for the company could turn out to be more costly to the employer.
• If the changes to the plan are complex, education meetings may be necessary whereas if the changes are minute they may be effectively summarized within a written notice. Other notices may be required if the plan provides for a “safe harbor” employer contribution, qualified default investment alternative (QDIA), or automatic contribution arrangement (ACA). New 404(a)(5) participant fee disclosure notices must be provided to all who are eligible. As with any change, when participants’ or beneficiaries’ rights to diversify or direct investments or to obtain a loan or distribution is suspended for three or more consecutive business days, a blackout notice must also be provided to the participants.

Needless to say, if you are a plan sponsor or employer contemplating a plan merger, please keep in mind how important retirement plans are in the broad scope of the business transaction. Take time to consult with your recordkeeper prior to putting any changes into effect. The retirement plans may seem like a small part of the entire equation but consulting prior to the change may save you lots of time and money in the long run.