News analysis: Merger and acquisition activity on the rise

Merger and acquisition activity appears to be on the increase again, and benefits professionals face a major task when organisations unite, says Ben Jones

With the possible takeover of Cadbury’s by US food giant Kraft and a proposed merger of Orange and T-Mobile hitting the headlines recently, mergers and acquisitions (M&A) remain on many firms’ agendas, with more expected as they look to extract value in these challenging economic times.

Organisations looking at M&A activity must take many things into account, including the financial implications, strategic decisions and logistical considerations. But such activity also poses a significant challenge for benefits professionals.

Phil Golds, part of the private equity and M&A team at Mercer, says: “It is one of the things employers have to look at. If they are looking to have everyone pulling together, having a consistent approach to benefits is very valuable.”

Balance to be struck

But there is a balance to be struck for acquisitive organisations looking to integrate a new purchase. “[Organisations] have to look for opportunities to see where they can balance their costs against offering better things for their acquired staff,” said Golds.

Tim Taylor, head of HR, reward and recognition at TUI Travel, which was created after a merger of First Choice Holidays and the tourist division of TUI in 2007, said good communication helped the two companies during the harmonisation process. “We tried to tell people what benefits would be enhanced, what would stay the same and where there would be changes. We had to look at existing legacy arrangements and see if we could harmonise those as well, where possible, and look at what [benefits] the market was telling us we should offer.”

Existing terms and conditions

When looking to merge two organisations’ benefits packages, employees’ existing terms and conditions must be taken into account. This is covered by the Transfer of Undertakings (Protection of Employment) (Tupe) Regulations 2006, which stipulate that employees’ terms and conditions, including benefits, are preserved when a business or part of a business is transferred to a new employer.

Bridget Wood, a partner in the employment and resourcing team at law firm Blake Lapthorn, said the difficulty of harmonising perks depended on the type of sale. “If it is a share sale, then employees are still owned by their original employer, but Tupe comes in when the assets of one company are bought by another.” In the latter case, it could take time to bring benefits into line, she added.

Pension schemes

With cost being a key factor in assessing whether a takeover or merger is a viable option, pension schemes are the benefit most likely to come under the microscope. In some cases, this cost could stop a deal from happening. Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The obvious issue is around final salary schemes as a potential inhibitor to deals. This is very high up on the due diligence list. If [an organisation] wants to buy a company that has a pension deficit of £5bn, then they take over that liability, so are buying a large debt. The rate that investments will grow is significant, and the rate that liability will grow is significant.

“Defined contribution pensions are much more straightforward. [Employers] are not taking on a deficit and they are dealing with a known, quantifiable liability.”

The signs are M&A activity is on the rise, albeit slowly. Wood said: “There is a lot of talk about it in the market. People are looking at it as a means of survival, while others want to buy a good name.”