Mergers and acquisitions – 6 tips for a smoother transition

For various reasons, when economic times get tough, there tends to be an increase in M&A activity.  This might be as a result of weaker firms getting “picked off” by stronger ones or the desire to minimise exposure by diversifying the markets in which businesses operate.  Whatever the reason, here are some dos and don’ts which shouldn’t be overlooked when considering a merger or acquisition:

  • Don’t get locked into taking on all staff – in the eagerness to get the deal done, purchasers of businesses often contractually agree to offer employment to all staff of the target business.  Whilst the end result may be that you will take them all on, having the option of picking and choosing the best staff can be invaluable for ensuring the ongoing viability of the business.

  • Do consider whether there is a need for redundancies – where merging similar businesses (either through a merger or an acquisition), it is almost inevitable that there will be a need for redundancies.  Remember the consultation obligations under relevant Awards and carefully evaluate and, in the case of an acquisition, factor into the purchase price the financial costs (such as redundancy pay and paying out accrued annual leave) associated with the redundancy.

  • Do review your employment terms and conditions and make sure that new contracts are entered into with transferring staff.  You should also consider whether there is an existing EBA or some other “transferring instrument” which will continue to cover transferring employees following the merger or acquisition.

  • Do investigate accrued entitlements for transferring staff – in most cases the purchaser of a business will be liable for accrued entitlements for transferring staff.  Unless the contract specifies that there will be an adjustment to the purchase price (in the purchaser’s favour), the cost of these accrued entitlements can be so high that the deal no longer stacks up.

  • Do consider whether you’ll recognise prior service – for the purposes of most employee entitlements, business purchasers must recognise continuity of service of transferring employees.  However, where the buyer and seller are not related, the buyer can elect not to recognise prior service for the purpose of redundancy payment obligations and annual leave (in which case the seller must pay these entitlements).  In addition, consider negotiating with the seller so that annual leave entitlements are paid out on termination of employment (i.e. prior to being employed by the buyer).

  • Do develop a strategy for integrating firm cultures – consider the management style and structure of the target business and how that differs from yours.  Is it a flat structure?  Is it hierarchical?  Are staff routinely involved in decision making?  How are key decisions communicated?  What is the communication style generally?  You should also consider the need for training (both initial and ongoing) in integrated systems and processes.  Think about training and appointing “cultural ambassadors” to champion the transition from one firm to two.  And remember, the change process can take several years so keep at it!

There are, of course, many other considerations in effecting a successful merger or acquisition but ensuring that you address these industrial relations and change management issues will hopefully get you off to a great start.

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