Over the past 18 months there have been fewer corporate finance transactions than for years and fewer MBOs than at anytime since 1984. While we may need to wait a while longer before transaction volumes reach pre-recession levels, there are signs of an increase in activity, with food giant Kraft’s bid for Cadbury and a proposed merger between Orange and T-Mobile hitting the headlines of late.

The recent increases to the FTSE Share Index indicate an improvement in general sentiment and confidence. This can also be seen in the level of corporate activity taking place within mid-market companies. The market seems to be segmented into businesses still reacting to a decline in general trade; businesses that have been less troubled by the recession and are being targeted by larger corporates; family-based businesses or orphaned subsidiaries which, for whatever reason, are looking to realise their investment or capital value; and businesses in search of funding either to assist their expansion or to plug a funding gap.

Against this backdrop, an issue which is sometimes overlooked during the M &A process is the harmonisation of employee benefit programmes. Warning labels should be attached to corporate transactions highlighting the dangers of not addressing this issue immediately. While this may sound dramatic the reality is that many companies find themselves looking for cover only once the transaction is complete. But this can be too late, leaving employees without the correct cover and employers facing the possibility of higher costs or uninsured claims.

Smooth transitions

Prior to any corporate transaction, it is important to consider the current and future provision of benefits for transferring employees. Organisations need to look at balancing costs with offering relevant benefits to their employees.

It might go without saying but employers need to pay heed to TUPE (transfer of undertakings - protection of employment), which stipulates that employees’ terms and conditions, including benefits, are preserved when a business or part of a business is transferred to a new employer. Those who ignore this until the transaction is complete may discover gaps in cover. Moreover, the true cost of benefits may not have been factored in adequately.

An obvious case in point is where the business being acquired has a final salary pension scheme that is in deficit. The acquiring organisation will essentially be taking on these pension arrangements and debt which, if not examined thoroughly beforehand, could be extremely costly. The situation may be simpler where pension arrangements are provided as part of a group personal pension plan as, in these cases, the employer is not required to guarantee individual members a specific pension payout. Nevertheless, the organisation should ensure that contractual terms and conditions are the best that can be achieved in the market.

Risks and rewards

In terms of risk benefits, there are a number of issues that need to be considered. The newly formed organisation may be able to secure better terms and conditions due to the increase in critical mass. Arguably, a full broking exercise should be undertaken to ensure that, again, the best premium rates are achieved.

Differences in the underwriting procedures of insurers also need to be taken into account. The new employer may be required to provide specific cover from a certain date, but will be unable to do so due to the stipulations of the insurer. In these instances, the new employer may need to self-insure any liability, which is not ideal, as any successful claim will need to be paid out of the company’s profits. Furthermore, such delays could lead to contractual issues between the new employer and the employee. If certain risk benefits written into the employee’s contract are not in place, this is a breach of contract and could result in the employer being taken to a tribunal in order to settle the matter.

Communication and morale

In addition to meeting compliance requirements, the issues of communication and morale need to be given high priority. A key factor in the potential failure of many transactions is when due consideration is not given to the harmonisation of employees, the relative cultures, strengths and weaknesses of the organisations.

Most employers, large and small, will readily subscribe to the theory that people are their most valuable assets. It is people who determine the success (or failure) of a business, which is why keeping employees engaged and maintaining morale through good communication is key to the success of any M &A.

Looking deeper into this issue, employers need to recognise that, by retaining their key employees, they will enjoy greater success than those organisations that adopt a more revolving door policy. By effectively rewarding and motivating people, organisations can reap the benefits of accumulated knowledge and experience, the trust and confidence of clients, smarter business processes, teamwork and flexibility.

At the same time, they can avoid the pitfalls of high staff turnover, with the time and cost of recruiting replacements; replacing lost knowledge and skills; the disruption to business activity when staff leave unexpectedly; and the damage to morale and productivity when staff are demotivated.

To a certain extent, this is a statement of the obvious. However, to achieve the holy grail of a loyal and motivated workforce post M&A, employers need to consider all the factors that contribute to an employee’s needs and to determine which of these they can and should implement in the best interests of the new organisation.

Roger Cook is employee benefits manager at Blacktower Financial Advisers, part of Kingston Smith LLP

WATCH THE ROAD

Key M&A considerations include:

* Differences in pension provision (contract terms and conditions).

* Ability to provide ‘like-for-like’ benefits.

* Whether differences in underwriting procedures may result in delays.

* Whether insurers are unable or unwilling to provide required cover for the new employer.

* Whether flexible benefit choices are affected.

* Ability to ensure continuity of cover, particularly for certain ‘risk’ benefits.