Operational Issues to Consider When Forging M&A Deals

In the world of mergers and acquisitions (M&As), companies should never lose sight of the fact that the institutions involved cannot function, progress, or fail without humans. In order to complete thorough due diligence, it is necessary to appreciate the contractual extent, and thereby the impact, of all employees, contractors, third-party vendors, and new customers—and applicable privacy laws—on the negotiations and ultimately the final cost of the deal.

Toby Zimmerer, a Director of Cybersecurity Due Diligence in the Transaction Advisory Services Practice of RSM US, speaking at the Medtech MVP Conference 2022¹, told the audience that the overall goal is to understand what companies are really buying. That means looking beyond the anticipated revenues, the earnings before interest, taxes, and amortization and considering the operational side. He says: “What additional costs are we going to take on? What additional obligations do we have to think about? We have to take a look at the operational risks.”

Meeting obligations

Employee benefits are a serious cost consideration, especially when bringing on a new 401k plan, says Zimmerer. Companies should investigate any additional costs from adding the new plan and whether the plans are compatible with those of the acquiring company.

Management also has to consider the Gramm-Leach-Bliley Act (GLBA), a law intended to protect customers’ financial privacy and data replication. A cloud service provider cannot replicate banking data outside US borders; most privacy acts, he says, will mandate the same thing. “The acquiring company can’t just say, ‘We have grabbed this service, we can use it and get going,’” he adds. “You have to think about where the information is going.”

Determining who will be manning the controls is also important. It is vital to ensure that the front office and back office have enough employees to support, operate, and ensure reliability; and if they don’t, to identify what it will take to get IT up and running.

Impact on employees

Companies also have to consider the impact of M&As on the employees who have been affected, says Zimmerer, especially the people who have been acquired. Working with organizational change management and trying to roll out new programs with large organizations, particularly when merging companies, require careful attention—far beyond benefits and a matching 401k.

When making such changes, here are some questions to consider:

• How are we going to integrate our teams?
• How well are we prepared to deal with things such as change management when bringing this new organization in?
• What happens if news of the merger or acquisition reaches the public first and employees are not happy—and are publicly stating that?

In the last scenario, companies involved in the M&A have to figure out how to manage employees’ public comments while ensuring they have the “venue to vent their concerns and raise them effectively,” says Zimmerer.

Contractor classifications

Knowing how contractors are classified before any agreements are signed is also important, Zimmerer says. If contractors are contingent, it must be determined whether they should stay or be replaced. How many employees have exempt status? And what about workers on a visa program—what are their terms, lengths of stay, and so on?

Zimmerer says that questions around intellectual property also must be addressed: “Are my contractors and my employees compliant with the non-disclosure agreement [NDA] requirements? Are they contractually obligated not to disclose it?”

Contractors’ non-compete clauses are another concern. “We outsource the contract labor to do code development all the time,” says Zimmerer. “Management, infrastructure, they have access to our data.”

The acquiring company must learn upfront if contractors with these clauses:

• are complicit with the terms
• have met privacy requirements
• have signed the non-compete agreement
• have breached any terms, making the acquiring company liable for what amount of money.

Payroll considerations

Payroll, in regard to integrating disparate systems, is one department that requires specific mention, says Zimmerer. If the acquiring company is expanding its reach into a new geographic area, it needs to consider cost-of-living adjustments, especially if the new company is based in an expensive area where fuel, housing, and taxes are multiple times higher than the location of the base company. Such a move also will affect hiring contractors, where their rate per hour will likely be much higher.

Knowing all these details in advance of signing an M&A agreement can impact the sale price and should be carefully considered, summarizes Zimmerer.

Resources

1. https://medtechmvp.com