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SEATTLE-Risk manager Julie K. Long received little advance warning when telecommunications giant SBC Communications Corp. combined with Pacific Telesis Group in one of the largest mergers in U.S. corporate history.
The merger was completed in April after being announced the year earlier.
"I have a tendency to walk in my office, pick up the newspaper and see what the company will do next and how it will impact my job," she told about 200 risk managers gathered last week in Seattle for Liberty Mutual Insurance Co.'s Sixth Annual Risk Management Forum. "Which is exactly how I found out about our merger with Pacific Telesis Group."
A merger "is a huge challenge, but it is also a huge opportunity," said the risk manager for SBC Communications Inc., whose parent company is now based in San Antonio, Texas. Pacific Telesis is a subsidiary.
Mergers can elevate risk management's visibility by giving the risk manager an opportunity to arrange a world-class program and risk financing strategy while obtaining savings derived from consolidation, Ms. Long said.
The highly regulated nature of her industry enhanced Ms. Long's challenge because upper management limited potential antitrust violation allegations by restricting information sharing between the two companies before the merger process began.
She was only able to compare renewal dates for both companies' coverages 60 days before the merger began.
In doing so, Ms. Long found that PacTel's property catastrophe program's renewal date fell on June 1, the same date that SBC renewed its excess casualty coverage, giving her only 120 days to integrate both companies' risks under the programs.
"No risk manager in their right mind ever has a property and a liability renewal on the same day that is the size of these," she said after her presentation.
SBC now has 118,000 employees and generates $24 billion in revenue with net income in excess of $3 billion. The risk management budget has increased to about $100 million, Ms. Long said.
While circumstances in her industry limited advanced planning, Ms. Long advised that risk managers can make or break their reputations by understanding the issues involved in a merger and being prepared to tackle one, if needed.
"Internal client communications are absolutely critical to your success," she said.
Risk managers should make sure that their communication to company officials includes discussion of how information management systems, such as those for risk management, benefits and payroll will be affected.
"Systems issues can turn out to be a big deal," she said.
In her case, numerous workers compensation financing issues had to be resolved. SBC generated about 1,500 claims annually while PacTel generated 4,000 a year. Each company also had separate financing mechanisms. Two separate fronting programs had to be merged for employees in 40 states. There also were four different third-party claims administrators with six separate claims administration contracts.
There were a variety of terms, conditions and cancellation notices, and they all had to be evaluated to determine if claims could be rolled into a new TPA or left as they were due to contractual issues.
"You would be absolutely astounded at the number of people you need for teams to make this work," she said.
While assimilating those types of changes, risk managers can't afford to let other responsibilities fall through the cracks, Ms. Long said.
"You have to know the status. You have to know how you are going to respond going forward. This is at the same time you are trying to figure out everything else that is going on and (deal with) new clients," she said.
Surety bonds, letters of credit and insurance certificates are pretty straightforward, she said. But they can add to a merger's challenges when there are two different sets to merge, and that must be managed at the same time as other merger issues are being resolved.
"Any one of these by themselves are very easily managed, but when you have it all come at you at the same time with a management directive that says 'Do it quickly, make it happen fast,' you have your hands full."
Determining which employees and service providers must be retained for the transition also is critical.
"Identify these key players very, very early on in the process because there are going to be certain areas of specialized knowledge or expertise (that you will need), or you are just going to need bodies around to make this happen," she advised.
"You must also be prepared for the delivery of difficult messages, and this makes the process even more challenging. We had a risk management staff reduction of five people."
Many long-term service pro-viders to the risk management department may be affected. For example, the broker function has been consolidated with the exception of a few specialized people in the property area for earthquake marketing and property loss control. "It impacts their budgets, their operations and their need for planning. So think about them when you go into a merger or acquisition."
Risk managers also should be able to show upper management the financial fruits of their departments' participation.
If possible, the acquisition should follow a couple of years of benchmarking, Ms. Long said. "We used the. . .Tillinghast corporate cost of risk standard. It is extremely helpful in reporting results to management. It also helps you focus on the high-priority areas.
Another risk manager with acquisition experience is Glenn A. Eisenberg, senior vp and chief financial officer for Charlotte, N.C.-based United Dominion Industries, which has 10,000 employees worldwide. In just a few years, United Dominion transformed itself from a construction company to a manufacturing concern that fuels rapid growth through the acquisition of smaller manufacturing companies specializing in engineered products.
At United Dominion, the risk management due diligence process helps qualify potential acquisition targets, and it substantiates their true value, Mr. Eisenberg said during his portion of the session presentation.
An environmental engineer and a risk management team evaluate such things as potential acquisition sites, loss histories and trailing liabilities.
A disciplined approach to due diligence is critical, because five years ago United Dominion did not own 75% of the businesses it does now, Mr. Eisenberg said. Additionally, the company's sales have tripled since 1991, due in part to acquisitions.
That disciplined approach requires having insurance practices and systems in place so the company can act quickly.
"For an asset purchase (which Mr. Eisenberg distinguished from a stock purchase), we simply bring the company in under our existing insurance coverages," he said. "Through our excess liability coverage, we can bring the acquisition candidate under our coverage with no additional premium. We negotiated that with our carriers."
That practice saved United Dominion more than $1 million annually after one 1993 acquisition, he added. Acquisitions also have been used to cut insurance costs in other ways.
For example, during that 1993 acquisition, "we also created some healthy competition between (their) carrier and ours, which reduced our premium costs significantly.'