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April 2015
Mergers and Acquisitions (M&A)              
Retention incentives, transaction bonuses, and more
Recently, I read KPMG's 2015 M&A Outlook Survey Report, The Boom is Back: M&A Reemerges as Leading Growth Strategy.  I was led to the report from a Thomson Reuters LinkedIn status update that stated:
"Global merger activity is off to the best annual start since 2007 as deal making momentum has carried into this year, powered by strong activity in the telecom, healthcare and real estate sectors and a record start for Asia Pacific M&A."  
It got me thinking about how mergers and acquisitions (M&A) might affect philanthropy, in general—and prospect research, specifically—as well as calculating a prospect's estimated giving capacity.
M&A is big business.  Reuters reports the cumulative value of all M&A deals during the first three quarters of 2014 to be at more than $1 trillion.  KPMG's report indicates that many companies are funding M&A activity with cash.  KPMG expects the healthcare / pharmaceutical / life science industry will lead in M&A activities, followed by the technology / media / telecom industry.
Mergers or acquisitions take place to create a new, combined entity with shareholder value over and above that of the sum of the two solo companies. In reality, M&A is more often about acquisition than merger; actual mergers rarely take place.  Outwardly, being bought out has a negative connotation to it; an acquisition is often referred to as a merger simply to make the deal more acceptable to staff and all involved—including public perception.
Whether a merger or an acquisition, the companies involved often seek to improve their standing with economies of scale, efficiencies, and/or enhanced market visibility. Sometimes companies seek to gain new technologies or intellectual property in the combining process. 
The rate of failure post-M&A is a surprising 50 percent, according to A Comprehensive Guide to Mergers and Acquisitions (Financial Times Press). Studies say companies that fail to achieve goals of the merger are at nearly 83 percent—an incredible percentage.
The reasons for such a high failure rate are many; among them, the valuation was too high, the culture shift between the two companies was too large, or the value was misunderstood. The reason for failure most consistently cited? Key employee turn-over. Consequently, may deals include retention incentives to combat losing key employees.
M&A doesn't create value for shareholders alone; executives are getting a piece of the value, too. Richard T. Bliss, a professor at Babson College, and Richard J. Rosen, then a professor at the Kelley School of Business at Indiana University, studied bank mergers that occurred from 1986 to 1995. In their study, Bliss and Rosen found that more than 75 percent of the mergers in the sample led to a 10 percent or greater boost in executive compensation. 
When a prospect's company is in the process of an M&A deal, work to understand how his/her compensation may change as a result of the deal—it could signal a good (or not so good) time to ask for a gift of stock.
Putting aside any changes in equity (vested shareholdings), there are three significant ways that a prospect may receive increased compensation:  trigger clauses in employment contracts that cause forward vesting, retention incentives, and transaction bonuses. 
In the event of an M&A, first look at the prospect's employment agreement (typically, an attachment to the 10-K filed around the prospect's hiring date).  Once the employment agreement is located, look for indications of forward vesting—usually indicated with such terms as single trigger or double trigger. A single trigger generally refers to the forward vesting of one's unvested options should the company be acquired.  Double trigger generally refers to forward vesting of one's unvested options when the company is acquired and the individual's employment is subsequently terminated. Knowing how the M&A deal will affect a prospect's options gives a better understanding of a prospect's resulting increased vested stockholdings. Remember, gifts of stock—appreciated assets—often provide tax benefits to the donor.
When a change in control of a company happens, surveys indicate that there is usually a different compensation plan for executives than there is for other employees.  Compensation is more often based on years of service and the position in the company—those who are in the executive suite and have years of service will be the highest compensated, often in the form of retention incentives. As you'll read below, not all deals are the same and there are differences in how M&A bonuses are paid out based on geographic location. 
Retention incentives (pay for staying) are customarily based on a percentage of the base salary and in accordance with the level and responsibility of the employee.  Mercer's Survey of Retention and Transaction Programs: Retaining the Right Talent for Deal Success provides some interesting insights that I will summarize. Typically, U.S. based companies pay a higher retention bonus to executives who are considered critical for the long-term success of the company—the median bonus is 95 percent of the base salary. In Canada, that median bonus drops to 75 percent.  In Asia, the median drops further to 45 percent, and Europe has the lowest median retention bonuses at 25 percent of the base salary.
Retention bonuses can come from one or both sides of the table—the company acquiring or the company divesting. Understanding the timing of the retention bonus will help the researcher understand the timing of a request for a philanthropic gift. It is most common for retention bonuses to be paid out in a lump sum at a pre-determined time period after the deal has closed. Most retention incentive bonuses are paid out within three to six months after the deal closes. But for key-employees—those who are critical to the long-term success—it can be 24-to-36-months before retention bonuses are received. Three-fourths of retention incentives are in the form of cash and about one-third are a form of cash and equity.
Transaction bonuses are paid out when there is a successful transaction. These bonuses are paid to the people who help make the deal happen—and the bonuses are almost always paid only when/if the deal closes.  CEOs, executives, and the team working the deal get the largest share of the transaction bonuses. In Europe, transaction bonuses are nearly always (90 percent of the time) paid to the deal team. In the U.S., only about 25 percent of the deals pay a transaction bonus.  In Canada it is lower yet at 13 percent, and in Asia, transaction bonuses rarely, if ever, exist.
In most cases, an M&A deal is learned from a press release or an article in a local newspaper. Researchers will need to read the articles or press releases carefully for nuggets of useful information.  The following list of resources can assist in researching M&A deals:
• Mergers & Acquisitions - Free registration will provide access up to six articles per month.
• Reuters - Publishes deals of the day.
• The New York Times - Has a search function to find current and historical deals.
I'd love to hear from you, dear reader:  What do you do when you learn your prospect is involved in an M&A deal?
What's my prospect's business worth?
Business value calculators
There are a lot of business calculators available—for free—on the Internet.  Here's a linked list of some of my favorites: 
• CalcXML
• BizEx
• Bridge Ventures
• Lincoln Financial Group
To learn more about valuing a business, read Bankrate's article: Selling your business? These methods help you avoid too-low and too-high prices. 
Is your prospect an owner or an officer of a publicly traded company?  If so, then you may want to download a free copy of the Anatomy of a Proxy reference sheet.
Send us your comments.
I welcome your ideas, comments, and suggestions.
If you've enjoyed this issue of my newsletter, please tweet about it, send it to a friend, or otherwise pass the newsletter on to your friends, family, and colleagues.
Margaret King
President, InfoRich Group, Inc.
Email your comments.
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