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Mergers & Acquisitions

With 100% audit acceptance in over a decade of practical experience, you can count on FAS Solutions to get your grant modifications right.

Mergers and acquisitions often involve consideration that impact the business combination entities as well as the participants in equity compensation plans. Typically the acquirer assumes awards – replacement awards – that replace awards previously granted by the acquiree. Although “Business Combinations” are covered by ASC 805, the calculation of fair value is governed by ASC 718. Specifically, under ASC 805, “…the acquirer shall measure both the replacement awards granted by the acquirer and the acquiree awards as of the acquisition date in accordance with Topic 718. The portion of the fair-value-based measure of the replacement award that is part of the consideration transferred in exchange for the acquiree equals the portion of the acquiree award that is attributable to pre-combination service.”

FAS Solutions’ comprehensive modification process begins with analyzing the terms of the modification with our client and assisting (as needed) to determine the correct accounting treatment and the shares impacted. We often find ways to limit the expense of the modification with a simple adjustment of the terms of the agreement. In cases of merger or acquisition allocation of expense to purchase period or amortization over remaining service period depends on facts and circumstances – in this regard we might also help.

However, our main contribution is in the valuation space where clients depend on our expertise to assist with fair value analysis of equity awards from options to relative TSR awards. A modification that is expected to be cost neutral may or may not result in the incurrence of incremental expense – companies have to do the work to find out for sure.

For options in particular there is a misconception that these mid-stream valuations are beyond the scope of Black-Scholes. This begs the question – do outstanding options at various levels of “moneyness” with various remaining contractual terms require a Monte Carlo or Lattice model to ascertain the fair value. The answer is that we can use Black-Scholes so long as the recalibrated intensity-based Monte Carlo is used to develop the correct expected term parameter. We have a long history of successful audits of our Black-Scholes valuations in cases of modifications in a business combination or spin-off circumstance as well as modifications in circumstances related to repricing, exchange, executive termination grace periods or acceleration, retirement eligibility conditions, etc. In the vast majority of these cases, unless vesting is contingent on a market condition (TSR, price hurdles, etc.) our intensity-based Monte Carlo expected term methodology delivers a Black-Scholes solution to our clients. The intensity-based Monte Carlo can be developed with client data and/or cross-company data which informs both pre-modification and post-modification valuations. Whether using own-company data or cross-company data (based on over a million exercises at hundreds of companies) FAS Solutions produces audit-tested expected term results for outstanding grants that are no longer “at the money”. We then calculate the incremental expense or replacement fair value, and provide clients with detailed reporting which documents and supports expense recognition. At the request of clients we can also assist in the capture of modification expense in the stock plan database.

For relative TSR awards – or any award with a market condition – our multi-factor Monte Carlo valuation methodology can capture the facts and circumstances of any modification whether implemented or under consideration.