Merging the $330 million in stable value assets in the defined contribution plans of the American subsidiaries of Akzo Nobel NV and Imperial Chemical Industries PLC took much longer than Akzo's $16 billion acquisition of ICI.
The problem: Akzo Nobel's fund used wrapped synthetic stable value instruments while ICI used pooled guaranteed investment contracts from 15 issuers managed by a GIC consultant. The funds also had different crediting rates and risk profiles.
The acquisition took 4½ months; the stable value funds' merger took nearly two years.
Jaime Erickson, manager of defined contribution plans at Akzo Nobel's Chicago-based U.S. subsidiary, said the “ideal solution” would have been to merge the GIC pool into Akzo Nobel's separate account stable value fund.
But Akzo Nobel's manager refused, triggering a chain of events that led Ms. Erickson's team to terminate the manager and ICI's GIC consultant, and hire Galliard Capital Management Inc. to manage the whole pot. Ms. Erickson declined to identify either company.
Galliard took control of the separate Akzo and ICI assets in May; in July, they were merged. Stable value now accounts for about 30% of the $1.1 billion in Akzo Nobel's total defined contribution assets.
Merging all other investment options in the combined plans went as scheduled on Jan. 1. Prior to the merger, ICI had 12 options and Akzo Nobel, 100. The new lineup has 100 options as well.
“It's not uncommon to have different (stable value) structures when Company A acquires Company B,” said Carrie Callahan, principal at Galliard in Minneapolis, which has more than $53 billion in stable value assets under management. “The differences will make sponsors evaluate their situation and ask. "What is the right solution and who can do it.'”
For Akzo Nobel, the process was complicated by uncertain capacity in the stable value wrap market. There weren't enough companies, primarily banks and insurers, willing to add wrap business. Wraps protect stable value funds' fixed-income portfolios against interest rate volatility and guarantee participants will receive the funds' book value.
“It was a very constrained market,” said Matthew Gnabasik, managing director of the Chicago consulting firm Blue Prairie Group LLC, who helped Akzo Nobel find a new stable value fund manager. “Some providers were peeling away. Some existing providers didn't want to write any more business.”
Consultants and stable value experts familiar with post-merger DC combinations say Akzo Nobel's decision to seek a new manager isn't rare, but also isn't typical.
“You need to be very creative with these transitions,” said Troy K. Saharic, a Seattle-based partner at Mercer. “The larger the acquisition, the more the lack of wrap capacity in the marketplace can create problems.”
Mr. Saharic estimated 20% to 25% of DC plan mergers that he's been involved with in the past year required the hiring of a new firm to manage the stable value assets.
Kevin Vandolder, a principal at Hewitt EnnisKnupp, Chicago, cited a 20% rate for hiring third-party stable value managers after a DC plan merger. Neither Mercer nor Hewitt EnnisKnupp was involved with the Akzo Nobel/ICI plans merger.