July 27, 2018

Agenda – Precautions and Pitfalls in M&A Pay Strategy, Part Two

By Robin Ferracone

In the first half of this series, I discussed what executives should consider early in the (M&A) process. In this half, I will discuss the five principal types of transactions that can happen in an M&A and how compensation strategies play into each.

Merger of Equals

In a merger of equals, a large company acquires a company of similar size, typically in order to grow and increase strategic control. Basic choices include:

Reinvent: Develop an entirely new compensation scheme

Adopt and Go: Cherry-pick components from each entity’s compensation system

Choose One: Select one entity’s compensation system to serve as the dominant blueprint

While reinvention may ultimately produce the best result, the process may be slower. Adopt and go may lead to higher compensation costs if the parties cobble together the highest-value components of the two companies, rather than working backward from an agreed-upon total-compensation target. Choosing one company’s compensation system may signify that the deal is really an acquisition rather than a merger of equals.

Strategic Acquisition

In a strategic acquisition, a larger entity acquires a smaller entity, often to secure a product or extend its geographic coverage. Last August, for example, DuPont purchased Granular, a farm management software company, for $300 million, helping DuPont’s “digital ag” business, which increasingly complements its seed and chemicals lines. In deals such as this one, the acquiring company’s compensation plan generally remains unchanged while the acquired company’s pay structure transitions to the new parent’s. In some cases, the acquired company will be a division or region of the acquirer and compensation will be tied in part to divisional or regional results, but the basic compensation structure is still that of the parent.

Roll-Up/Consolidation

In a roll-up or consolidation, a large company acquires a smaller company, often called a “tuck-in.” The consolidator is typically growing, scaling and gaining strategic advantages by rolling up sub-scale entities. The acquired entity may continue to operate as a region or division; generally, however, the company being acquired is fully integrated into the larger organization. The biggest challenge tends to be cultural, since the consolidator is applying its way of doing business to a smaller, entrepreneurial entity.

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