Smoothly adjust equity plans in an acquisition or spin-out.
Everything changes in M&A transactions, starting with the treatment of equity awards. In an acquisition, acquirers need to decide whether to assume the equity of the target or cash out the equity and then issue new awards of their own. Choosing the former means more efficient share conservation and a smoother transition for employees of the target firm. The latter approach consolidates everyone onto the same compensation vehicles.
After that, the compensation, stock plan services, and accounting functions must collaborate on execution. Typically, compensation spearheads grant documents and other legal agreements. Stock services usually handles the movement of data between target and acquirer. Accounting owns the downstream calculations.
A spin-out transaction is even more complicated. Key stakeholders need to decide how to treat the equity. The “shareholder” approach gives LTIP participants equity in both the spinnor and spinnee at the conversion rate given to shareholders. The “employment” approach gives LTIP participants equity in the firm employing them post-spin. Each approach is prone to causing surprises: The shareholder approach is tougher to pull off administratively and may leave employees confused, whereas the employment approach can easily give rise to unintended windfalls or deficits if conversion rates are not appropriately developed.
Data conversion is also important in a spin-out since the two companies will gradually grow apart and erect information barriers. Collaboration between stock plan services and accounting is critical to avoid major surprises and downstream process problems.
How We Help
We assist with all aspects of an M&A or spin-out transaction:
- Provide broad or narrow project management support encompassing all aspects of the transaction (stock administration to accounting to participant communications)
- Advise on the different ways to treat equity (e.g., shareholder vs employment approach) so you can weigh the pros and cons of each
- Model the pro forma implications of different equity treatment approaches so you can evaluate how employees may perceive a decision and what the accounting will be
- Test for incremental cost and identify risk factors that may contribute to unexpected cost surprises
- Advise on the accounting implications stemming from various incentive design decisions and provide detailed modeling using both hypothetical and actual data
- Provide critical support for data conversion (actual conversion and control testing)
- Deliver one-time and ongoing financial reporting support.
- Perform valuations of the converted equity, including audit support, all the way to producing the requisite accounting entries
- Develop customized participant communications materials and support in the rollout and distribution process
