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Article | Benefits Hot Topics

Divestitures create unique challenges

Health and Benefits|Mergers and Acquisitions
Future of work|Mergers and Acquisitions

By Kate Hubben | March 24, 2020

Proactively addressing risks during a divestiture or acquisition is critical to ensure today's unknown doesn't become tomorrow's unpleasant surprise.

While 2019 proved to be challenging for companies looking to complete transactions, deals are continuing to happen, including divestment of noncore assets. Successful dealmakers continue to look for ways to minimize the risks of value erosion and delay.

Divestitures create their own type of human capital challenges, especially for the spinoffs into smaller entities that may be in uncharted waters of creating and managing their own health and welfare program.

Many of our clients look to us to handle the due diligence for employee benefits during a divestiture and there are specific ways to avoid mistakes if this is in your sights for 2020.

  1. 01

    Thou shalt not promise.

    Employees spend a lot of time asking management about their benefits when a divestiture is imminent. They want to know about cost, benefits and … yes, whether they will have to change doctors. These questions will arise well before the answers are available. It is critical to prepare a consistent message for employees based on what you can and can't answer, and do not promise that "nothing is going to change." Inevitably, some element of benefits will change and there is absolutely no way to determine costs until the new group is underwritten.

  2. 02

    Understand carve-out costs.

    Basing health and welfare program costs on the current costs may be a starting point, but it's not the correct input for future spinoff entity financial planning. HR professionals should always reach out to the existing carrier for two purposes: first, to see if they are interested in retaining the group, since they already have claims data on the employees who will be employed by the spin off entity; and second, to secure cost estimates on a carve-out or stand-alone basis. The insurance vendor to the parent company or "seller" can always have the right of first refusal to continue to work with the spinoff company. Deal teams leading these divestitures can be reluctant to allow for conversations with outside parties during the process. It's HR professionals who will need to make the case with legal and deal teams about the ability to discuss appropriately with vendors and get appropriate cost estimates for their spinoff planning.

  3. 03

    Beware the MEWA.

    Some companies involved in a divestiture will retain the financial obligation of health benefits for the newly formed company as a means to ease the transition for employees and tackle all the other challenges for the spinoff before the following plan year. This sounds great in theory; however, if a company is paying for benefits for more than one employer, it might be considered a Multiple Employer Welfare Arrangement, or MEWA. The MEWA requires burdensome filings, reporting and funding guidelines and tremendous oversight by government entities. In some cases, there is no way to avoid the MEWA, but make sure to discuss this with your consultant or ERISA attorney before you try to defer the benefit plan separation to post-close.

  4. 04

    See the forest for the trees.

    The most common reason why top talent leaves during a divestiture or other type of transaction is not money, but discomfort with the culture. According to Willis Towers Watson's Global M&A Retention Study, the aggressive pursuit of competitors and dissatisfaction with their new role or the strategic direction of the company also result in the loss of top talent. Nowhere does it say that you lose top talent because the deductible increased on the new benefits plan. If top talent feels valued and communicated with, they can and often will adjust. It is imperative to put employee benefits in its proper perspective and not have internal strife around the creation of a plan. As mentioned above, employees will have detailed questions before you have answers. This doesn't mean you can brush these questions aside, as they are incredibly personal for employees and their families. Careful change and communication plans should be developed to keep people informed throughout the process.

Proactively addressing these risks during a divestiture is critical to ensure that an "unknown" today doesn't become an "unpleasant surprise" tomorrow. Companies need to focus on the viability of the new organization, and cannot underestimate the work involved in establishing stand-alone employee benefits. This is not business as usual, and typically falls on the shoulders of people who have to ensure daily operation of the parent company does not falter.

Outside expertise and support can be critical to managing the significant amount of work in accordance with the deal timelines, while creating the right employee experience throughout.

Author

Associate Director, NA Health & Benefits

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