Mergers & Acquisitions: Due diligence is vital

If you read nothing else, read this…

  • De-risk the pension scheme(s) the less risk and lower liabilities, the better.
  • Check contracts. Are there any difficult commitments lurking?
  • Check the rules on benefits will the sale trigger any difficult payments, such as stock option payouts?
  • Communicate. Employees need to know you are preparing for a merger.
  • Check your administration have you done everything you should have?
  • Clean data, ensure you are up to date.

There is a lot to check out about a potential acquisition and the benefits package demands careful attention, says Sarah Coles

In any marriage, it pays to know everything important about your partner before it is too late to change your mind. In merger and acquisition (M&A) situations, the due diligence process enables the buyer to assess all the liabilities of its intended acquisition and assess whether the claims it has made are true. Compensation and benefits should be a prominent part of this.

Given the scale of liabilities, if there are large pension schemes, particularly defined benefit (DB) plans, it is vital to know where you stand. Raj Mody, partner and chief actuary at PricewaterhouseCoopers, says: “A decade ago, you agreed the deal, then considered pension issues. Now that has been turned on its head and buyers do not do the deal until they have got to the bottom of pensions.”

For a DB scheme, the full economic cost and risks must be assessed. Terry Simmons, partner and head of pensions at Ernst and Young, says three key questions must be asked: What is the impact on profit and loss? What contributions will trustees demand in future? What other risks are there?

In this third area lie many pitfalls. Mody says it is vital to understand the balance of power with trustees and whether they can constrain the actions of the sponsoring employer. There may also be legacy issues such as data problems and administration niggles. Also, will any transaction trigger a demand for full and immediate payment on a buyout basis? Robin Ellison, head of strategic development for pensions at law firm Pinsent Masons, says: “Defined contribution is much easier than DB because you only need to know whether contributions have been paid as they should have been and take a look at the accounts, the contract and the investment allocation.”

Understand outstanding commitments

Pay is another major consideration. The wage bill is one liability, but buyers also need to understand outstanding commitments, and whether, for example, any kind of uplift is promised within certain contracts. Likewise, bonuses must be considered, and other important questions include: Are any bonuses contractual? What long-term bonuses remain outstanding? What liabilities will carry over?

Finally, there is administration within the payroll. For example, has it adhered to rules and legal requirements, and have all taxes and benefits been paid for as promised?

The other major area worth visiting in depth is executive stock or share plans. Mody says: “You need to understand any legal commitments and whether M&A crystallises these. Some plans may get accelerated, so you will face an earlier bill. Also beware of any new rules around executive reward. Issues can be created here if you are in the middle of an M&A process and legislation is changing at a frenetic pace.”

Other matters range from sick leave and pay entitlements to working time and time off. What must be carried over, and what can be left behind? What is contractual, and what is custom and practice and can be argued to be contractual? Mody concludes: “A classic danger to watch out for is exceptions to the rules, such as side letters and personal deals with senior individuals. A key question is: ‘Do you have arrangements that do not conform to the standard rules?’

“There are significant reward and pensions issues in any M&A activity, and it makes sense to involve reward professionals early in the process.”

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