Magazine article Risk Management

Mergers and Acquisitions: Buyer Beware

Magazine article Risk Management

Mergers and Acquisitions: Buyer Beware

Article excerpt

Mergers and Acquisitions: Buyer Beware The three most important factors to be concerned about when negotiating a merger or acquiring a company are pension, multi-employer withdrawal and retiree medical liabilities, according to Ethan Kra, a principal and actuary for William M. Mercer Meidinger Hansen Inc.

In recent remarks to members of the New York chapter of the International Society of Certified Employee Benefits Specialists, Mr. Kra said it is important to first determine what pensions plans a targeted company administers. When examining pension liabilities, he suggested looking for unfunded benefits or benefits technically earned in the future but attributable to past service.

For example, take the employee who had worked 20 years by the time of the sale and who decides to retire five years later. That person may have joined the company earning $20,000 a year, could retire making about $36,000 annually and would then be entitled to a $9,3000 pension. About $1,800 of that amount would have been earned during the last five years of service, whereas at the time of sale, the buyer only recognizes $7,500, which was incurred over the first 20 years.

It is important to note whether a company's existing pension plans have enough money to cover these liabilities, Mr. Kra said. Companies may consider dividing the obligation, having the seller take responsibility for the retirees and the buyer take resposibility for the current employees. The company which takes on the obligation would have the benefit of a tax deduction, he said.

An asset sale of a company contributing to a multi-employer pension fund may trigger unfunded liabilities which could greatly affect the buyer. In that case, the purchase price should be adjusted to compensate for the cost of the liability after the extra cost of the plan versus withdrawal penalties have been assessed, Mr. Kra said. Section 4204 of ERISA provides bonding requirements designed to hinder triggering these penalties. A stock sale does not trigger withdrawal liabilities since technically "nothing has occured," he added.

"Retiree medical liabilities are extremely assumption sensitive," said Mr. Kra. "Watch out for a typical retirement plans in certain industries which allow early retirement to those employees whose age plus service equals the floor set by the plan."

To estimate a company's retiree medical liabilities, MR. Kra said that buyers should add the assets and pension plans to the unfunded liabilities and subtract the surplus of pension. …

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