Because of the weak economy, fewer companies are pursuing mergers and acquisitions. However, for corporations that do pursue such deals, the current financial uncertainty makes it even more important to follow best practices in HR and employee benefits.

"We have seen decreased activity in M&As over the past 12 months, the exception being a few smaller acquisitions that are of a vertical nature. We would expect that M&A activity would increase in 2009, once company values stabilize and capital becomes more available," says Patrick Haraden, senior vice president of employee benefit services at Longfellow Benefits, a consulting firm in Boston.

Len Gray, head of the Americas M&A practice at Mercer, agrees: "The level of activity has declined dramatically over the last couple of months. Many transactions are actually being put on hold" because it's hard to get bank loans now.

Benefits may be shifting under some of the most recent deals. "Given the economic climate and high level of unemployment, there are more companies that are mandating that the company that is acquired migrate to the purchasing company's benefits program," Haraden observes. "In the past, it was commonplace to grandfather or make employees whole in terms of benefits. The new best practice is to keep it simple, consolidate for efficiencies, communicate and educate employees."

Deanna Smith, a benefits specialist at Grey Healthcare Group in New York City, oversaw the transition of benefits during three acquisitions that her company completed in the last three years. Each time, the employees at the acquired company shifted to the benefits at Grey. This often happens because larger companies tend to have better benefits, Smith noted.

Tips for the transition

According to experts, below are some of the best practices in handling employee benefits before and after a merger, acquisition or divestiture.

1. Encourage senior management to involve HR/benefits pros in talks about the transaction as early as possible, so HR/benefits leaders are well-informed and have enough time to coordinate with insurers and communicate with employees. "You want senior management to include you in the transition and not surprise you," Smith says.

2. Create a project management office to coordinate everything related to the transition. Prepare a process map for the transition, identifying roles and responsibilities well in advance.

3. Conduct a cultural assessment and develop a well-thought-out strategy for the culture of the newly integrated organization, knowing that it can be hard to bring two different corporate cultures together under the same roof. Factor the cost of cultural integration into the deal price. There's an average 10% productivity drop when an upcoming merger or acquisition is announced, leading to a 2.5% dip in profitability, estimates David Hinkel, a senior consultant in Towers Perrin's M&A practice. "Maintaining employee engagement throughout the transition process is critical to securing the inherent value in the organization and ensuring that you're providing good service to your clients and customers," he notes.

4. Carefully assess and plan for the future staffing needs of the newly integrated organization.

5. Assess and define the future structure of HR technology to avoid disruptions in fundamental HR services and benefits.

6 Don't panic. "Whenever there's a change, some people tend to panic. If you have a cool head, that tends to help," Smith says.

7. Communicate clearly and earlyto your workers.

Gray recommends telling employees as much as possible, as early as possible, even when some details have not been finalized yet. Don't be afraid to tell your employees something like, "We don't have the answer right now, but more information is anticipated two weeks from now." In addition, tell workers where the organization is heading and what the changes will mean to individuals, Gray suggests. The communication "needs to be systematic. It needs to be consistent. It needs to be well-organized," he adds.

Hinkel agrees: "It's better to over-communicate than to under-communicate. With under-communication, people always assume the worst. You need to speak with a consistent voice, so give managers a tool kit to help them answer employees' questions."

Quick deals

The recent market turmoil is good news for companies with cash to spare, and it's leading to what one consulting firm calls express mergers and acquisitions.

"Quite a few companies are undervalued due to the financial crisis," says Eric D'Amours, leader of Towers Perrin's M&A practice. "Organizations that have cash available are in a unique position to make acquisitions. If you can buy a company for 30 cents on the dollar, there's no point in really doing an extensive due diligence, so the time between the announcement of the deal and the time the deal is closed is very short."

Transactions were completed almost twice as quickly in 2008, compared to 2007. The average duration from announcement to completion dropped from 142 days in 2007 to just 80 days in 2008.

"Some of it is flying by the seat of their pants and being very reactive," Hinkel says.

Postponing due diligence until the deal closes isn't without risk. Employee engagement at the company that's being acquired might be very low, says D'Amours. "You're going to have an additional challenge of getting the value of the business if the employee engagement is pretty low," he says. "This is a risk that needs to be assessed properly. You can have a good deal on the price, but there's a reason the price is low."

D'Amours also cautions organizations on the hunt for bargains that the usual risks associated with buying another company - including the pension, benefit and compensation elements - still need to be assessed.

"You need to allow for some margin for surprises [after the fact] because those risks haven't gone away," he says. "If you haven't done your due diligence properly before closing, you're going to have to do it after the fact."

The company's financials related to pensions and other benefit plans can be an issue. "The impact of those pension and benefit plans may not be properly reflected in the books of the company you're buying," notes D'Amours.

"But because you don't have time to do this due diligence beforehand, you may not uncover that until after the fact."

D'Amours advises organizations involved in quick mergers and acquisitions to ensure their integration plans are flexible enough to accommodate any surprises.

"Because you don't know ahead of time what you're buying from a pension and benefit standpoint, you need to allow for some extra time for the transition," he says.

Avoid these M&A missteps:

• Failing to include HR/benefits staff (and benefits consultant/broker) early enough in the process.
• Not understanding the promises and commitments made to existing employees.
• Not getting an accurate census of all employees who are on paid leave, FMLA leave, disability or COBRA.
• Misunderstanding the assumption of liabilities.
• Noncompliance issues in reporting, deadlines and state requirements.
• Under-communicating: Failing to give employees enough information, or communicating too late.

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