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The long shadow of benefits

Employee Benefits/Insurance:
The long shadow of benefits

Employees’ benefits packages might be a point of fact on the negotiations table during merger or acqui-sition talks.
Then again, they could become the factor that decides whether one company acquires another–or even considers the deal in the first place, experts say.
Benefits also play a role in how a business consolidates a new unit into its operations.
It all depends on the type of company, the benefits package itself and the value of employees who carry the benefits.
When Bausch & Lomb Inc. acquired California-based Arnette Optic Illusions Inc. and Scotland-based Award PLC last year, benefits were not a point of concern, spokeswoman Holly Echols says. The company took the benefits packages along with the employees.
But while Bausch & Lomb is large enough to absorb any extra costs associated with a benefits package, smaller firms must weigh every aspect of a company’s assets and employee-compensation packages, experts say. For those firms, the attraction of a merger is the costs that can be saved by consolidating units.
But they could end up losing the savings achieved by eliminating duplicative efforts with new, higher benefit costs, says Stacey Kole, assistant professor of economics and management at the University of Rochester’s William E. Simon Graduate School of Business Administration. That is what happened when USAir Group Inc. and Piedmont airlines merged to form the company now called USAirways.
The new company spent millions to bring former Piedmont employees up to USAir benefits levels and learned the hard way that its compensation package was a main reason why Piedmont was a low-cost airline, she says.
That example shows why companies shy from acquiring companies with benefits packages that are substantially different from their own, Kole says. It also shows why some acquired businesses end up as wholly owned subsidiaries instead of integrated units of the parent company.
Kole has researched the thought process companies use during mergers and acquisitions.
“What was a surprise was that companies don’t spend a lot of time … talking about integrating operational units,” she says. “They tend to focus on the bottom lines.”
Compensation packages are what can complicate or ease the integration, Kole says.
For ViaHealth, formerly the Greater Rochester Health System Inc., the ability to save money, while offering the same or better benefits, was a selling point in its mergers, says Louis Paris, the system’s vice president of human resources.
Paris sat at the table during each set of merger talks touting the positives that a pooling of finances would bring.
As far as the bottom line, merging the Rochester General and Genesee hospital staffs saves the system 9 cents on every $1,000 spent on life insurance, he says. By being able to self-insure items like workers’ compensation as a larger employer, ViaHealth was able to save one of its nursing homes $450,000 to $500,000 a year.
As a result, ViaHealth was able to take the best of each of the compensation packages, so employees have at least the same level of benefits they had before the consolidations, he says.
However, he notes, offering a single, unified financial package to employees is only one step.
“The toughest thing,” Paris says, “is the policies, not the benefits.”
A new employer will still have disgruntled employees if the company offers more sick days but changes the policy of allowing the workers to use the sick days if their children are ill, he says.
“Those issues take longer to work out from the benefits standpoint,” he says.
The importance benefits play in merger and acquisition negotiations usually depends on how important the employees are to the buyer, says Clifford Smith Jr., the Clarey Professor of Finance and Economics at the Simon School.
The buyer, he explains, could say to the workers when an acquisition is completed, “OK, you’re an employee of the acquiring firm. Here’s the package, and this is how it’s different than what you have. You decide if you want to stay.”
On the other hand, if the human capital is why a company is being acquired–for example, a high-tech research company–the buyer will need to be more sensitive to the workers and what they want.
“Ultimately, what a successful bidding firm is going to have to do is ask why (it) wanted the company in the first place,” he says.
It could be that the acquiring company makes one deal for higher-level employees and another for floor workers, Smith says.
The business being sold also plays a role in how much benefits get negotiated.
“If someone is planning on staying with the company after the merger is over … those issues are more likely to be part of the negotiations and laid out up front,” Smith says. “If they’re selling it to exit the business personally, and there’s a lot of turnover in the particular industry anyway … then (benefits are) less likely to be a central point of the negotiations.”
Lois Warlick-Jarvie, vice president of human resources for Curtice Burns Foods Inc., says Curtice Burns officials made a point of bringing up the issue of benefits in negotiations to sell its private-label canned-vegetable business to Seneca Foods Corp. They encouraged Seneca to continue treating the employees well, but benefits did not play a central role in the talks.
However, if Seneca Foods’ compensation package was not very good, or vastly different from Curtice Burns’, the point would have become more important, she says, even playing a direct role in the decision whether to move ahead with the sale.
The hardest part on both ends is deciding just how important the benefits packages are, say the economists and human- resources officials. Once that decision is made, it is a matter of details.
Eugene Parrs and other attorneys who deal with mergers and acquisitions agree, but say companies can get in trouble if they do not pay attention to those details. They could be stuck with unexpected liabilities or government fines for not following regulations.
“Problems arise when they don’t worry about the plans until the last minute,” Parrs says.
For example, if the buyer does not want to continue an acquisition’s 401(k) plan benefit, officials need to decide whether the company will freeze the fund but still manage it, or tell employees they need to set up an account on their own for the assets.
There are regulations concerning 401(k) plans, so companies must investigate the steps needed to terminate a plan, Parrs says.
It is even more complicated to terminate or merge pension plans, especially defined-benefit plans insured by the Pension Benefit Guaranty Corp., he says. The PBGC plays a role with pensions>similar to the Federal Deposit Insurance Corp.’s role with bank accounts.
In that case, companies must follow strict regulations in taking over a plan and obtain PBGC approval, as well as the Internal Revenue Service’s OK, Parrs says.
Tax benefits or liabilities may be involved in the transfer of many types of benefits funds, so employers need to study each one, says Robert Wild, an attorney with Nixon, Hargrave, Devans & Doyle LLP.
There also are hidden liabilities or assets within the funds, he says.
For example, pension funds could be underfunded or overfunded. A company also might not have complied with all regulations, which would result in hefty fines once the government starts reviewing applications for merging or discontinuing the funds.
The same is true for self-funded insurance plans, albeit with a smaller risk or windfall, Wild says.
Rochester General and Genesee merged more than two years ago, but Paris says ViaHealth cannot merge the pension plans until this summer because of all the regulations and waiting periods.
For ViaHealth, the merging of the plans was cumbersome because of the details, but officials did not face any unexpected problems because both were overfunded and healthy pension funds, Paris says. In the end, Genesee employees will see a 10 percent increase in their pensions because Rochester General had a better deal before the merger.
As consolidations continue in health care and other industries, Paris says, many employees will be able to receive improved benefits because of the economies of scale.
However, in some mergers, changes in culture can negate the positive changes in benefits packages, Paris adds. Therefore, companies must concentrate on effective communication of changes and the reasons behind them if a merger is to be successful.
“These are exciting times,” he says. “But even if the details are better, change is tough.”


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