How to ensure day-one success when completing public to private deals

Being told a company is being taken private can be a stressful and unsettling experience for impacted employees, who will have a lot of questions: ‘Will I be made redundant? What if I don’t like the new strategy or culture? What will happen to my share plan entitlements and other benefits? And, does this mean a lot more work for me?’

In order to preserve value, buyers should be sensitive to these employee perspectives when considering taking a listed group into private ownership. Although it is unlikely the buyer will be able to communicate directly with the target company’s employees prior to closing, buyers can, through their commercial decisions, ensure they inherit a healthy and stable workforce that is excited, rather than worried, about the company’s next chapter.

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Here are four issues buyers should consider when agreeing commercial terms and pricing offers:

1. Transition pay models slowly

In synergy planning, resist the temptation to identify savings immediately and instead look to integrate and harmonise pay structures slowly. For example, committing to maintain target total compensation levels for 12-24 months post-closing will allow employees to be financially secure during the sensitive period when they are deciding whether they like the new owner and/or the nature of their new role. This allows employees time to adjust, rather than jump ship prematurely.

2. Negotiate retention-based incentives to support transition

At the point of closing, some or all of the target management’s incentives may pay out. While assessing the cost impact of this is important, understanding if retention risk for key talent will be generated is also key.

Look for ways existing incentives could be repurposed to support post-closing retention for only incremental additional cost. This might involve guaranteeing a minimum level of annual bonus pay-out for everyone employed and not under notice at the payment date.

It could also mean replacing the value of long-term incentives that lapse on closing with new awards paying out on the same schedule, to ensure the amount of pay received year-on-year remains stable over the transition period.

3. Look for low-value, high-impact opportunities to reward workers

During the diligence process, try to understand what aspects of the employee value proposition the broader employee population regards highly. Public confirmations that no changes will be made to agile working policies or pension arrangements, or that foreshadowed cost of living pay rises will be honoured, could set a positive tone.

Where prized aspects can’t be maintained (for example, lucrative save-as-you-earn or share incentive plan schemes), upfront acknowledgement of this via one-off compensatory payments may have great impact for relatively little cost.

4. Offer increased certainty of treatment for outgoing employees

If employees know they will get a good exit package, they are less likely to resign prior to closing as a precautionary measure. Certainty could be given in financial terms (e.g. all employees will receive at least three months’ notice), or via commitments as to process (e.g. all employees will be paid in lieu of their notice period in a lump sum).

If the terms in relation to employment and remuneration are approached thoughtfully, they can drive a positive perception of the deal within the target workforce and set the acquisition up for day-one success.

Cara Hegarty is partner in the employment and incentives team at Linklaters