It is not uncommon for M&A practitioners or business players to think of divestitures as being similar to acquisitions.
However, as HR expert Jillian Kaebel-Sisk notes, once one has experienced both, it is clear there are key differences between the two business initiatives in relation to time and workload.
While one might imagine divestitures to be easier than acquisitions because an entire population does not need to be integrated, divestitures actually can take longer and prove to be more complex, especially if data must be gathered from multiple countries and/or populations.
Here we take a comprehensive look at Human Resources’ role in divestitures, as well as proven best practices for divestitures and how they differ depending on deal type.
1. Consulting with Corporate Development teams
While this question certainly depends upon the company one is in and the type of deal taking place (stock vs. equity – more on this below), best practices prove HR should get involved early.
Specifically, HR should work with Corporate Development teams during the strategic and opportunity analysis phases.
Initially, corporate development will consult with HR to discuss potential divestitures and talk through the different phases of the transactions (all the way to execution).
Throughout the process, HR will remain heavily connected to corporate development to handle and track the potential issues brought up during these initial conversations.
In a nutshell, early on, corporate development is looking for consultative type advice on topics such as: retention programs (and the cost of these programs), laws, and additional considerations HR may have for the deal structure.
2. Gathering information
Next, HR is responsible for gathering key information related to employees, such as benefits and compensation. Here, HR acts as a liaison, working with the Compensation and Benefits departments.
When HR must work with multiple countries and varying employee populations, this step becomes exponentially harder; in these cases, HR must develop and connect with local contacts to review the laws of the various countries.
Clearly, it is helpful to establish these contacts in other countries before the data collection process begins.
3. Setting up the data room
Finally, HR must take the above information and put in into a data room for the buyer to review. Employee privacy and protection must be considered during this step.
For instance, it is not uncommon for a company to plan the closing of a facility and then have a local entrepreneur or business owner buy the facility.
Suddenly, the facility closing becomes a divestiture, and the seller has to be prepared to move quickly. If the gathering of information and planning for a possible divestiture had commenced when the notion of closing the facility originated, the divestiture would be easier for HR to handle.
Bottom line: when there is talk of a closure or carve-out, begin planning!
How Does an Asset Sale Differ from a Stock Sale?
From HR’s perspective, there are two key differences between an asset and stock (equity) sale:
- What happens to the employees
- How the employees are transferred
In an asset sale, the buyer is able to select the assets it wants, including employees; therefore, the buyer will choose which employees it feels are needed to run the business. In a stock, or equity sale, however, the buyer purchases the company with all functioning assets.
This means all the employees and all the liabilities that go along with these employees go to the buyer.
Clearly, this makes stock sales simpler because the employees are not being terminated by one company and then hired by another (which would involve background checks, drug testing and other parts of the buyer’s hiring process).
Furthermore, this type of sale is less traumatic for employees. Benefits exist for the seller as well because it does not have to generate and provide severance packages.
Overall, for the seller, a stock sale is ideal as it is a “win-win” for both the seller and the employees. Even buyers admit that although they have less “selection” during a stock sale, this type of deal generally works better for both the buyer and seller.
How do Legalities Come Into Play During Divestitures?
HR departments are obviously more familiar with the laws in the United States. Generally speaking, in the U.S., the new buyer will simply hire the employees that are part of the divestiture.
In other countries, however, often times there are more employee protections in place so a buyer cannot always be as selective on what employees it will retain – even with an asset deal.
What is Ring Fencing and How Does HR Utilize It During Deals?
“Ring Fencing” is an industry term used to identify employees that are critical to a deal’s success; specifically, employees you do not want to leave because it could be detrimental to the deal and the continued success of the business.
In simpler terms, one wants to “fence in” the right people so the part of the company being sold can continue to be successful after the sale.
This group should be identified early in the process during the analysis phase; however, this group is a “living” group, meaning it will ebb and flow throughout the lifecycle of the deal.
Around the time of the final deal announcement, this group will be set in stone.
What Happens to Employees in a Divestiture?
Ring Fencing seeks to secure the cohort of employees that are most likely to guarantee the newly merged entity will achieve the corporate goals set out by the acquisition.
But what of the rest?
A good starting point is to adopt the mindset that the employees in this group may turn out to be just as valuable over time as those in the first group.
For example, junior, recently employed, or even more senior staff that haven’t found their ideal role within the company yet, can all have an important part to play in helping the company prosper.
At the same time, realism is called for: In a standard acquisition process, some changes of position or layoffs are required if the planned synergies are to be met.
This demands that the HR team begin putting together a strategy for both groups, and the HR operational implications (payroll, HR functional structure, HRIS, and more), as soon as the green light is provided by senior management.
What does a Carve-Out Consist of From HR’s Perspective?
To put it simply, carve-outs are an enormous amount of work and can prove to be a bit of a guessing game.
What makes them so complicated?
Not only are carve-outs complex from tax and IT perspectives, they also are difficult because essentially one is trying to take a population of employees that are integrated into your business and have them stand alone. It is fairly equivalent to starting a new company.
HR is responsible for considering how these employees will be paid, how they will benefit, and how assets will be provided.
What are Best Practices Related to Communication in a Divestiture?
“Communication is key” is not just a cliche in divestitures – it can protect the deal and reduce employee stress, resulting in higher retention.
In fact, it is the least expensive thing that can be done to accomplish these goals. Here are some best practices for developing a communication plan during a divestiture:
- Ideally, during a divestiture, put together a communication team (one that falls outside of HR).
- Begin communicating with the employees early on.
- Specifically, set up FAQ sessions with employees to reduce some of their stress and anxiety. If a question comes up during a FAQ session that HR cannot answer, HR should be responsible for tracking down the answer and dispensing it to employees.
- Keep a detailed FAQ session log.
What are Key Materials HR Must Prepare When It Comes to Divestiture Diligence?
- An in-scope employee list (ring fence them!)
- Information related to the above list that will be helpful to the buyer (be sure to de-identify this information) such as policies, benefits, and compensation
Again, HR is responsible for not only compiling the above information, but also for entering it into the dataroom. If the seller is working with multiple buyers, a few things might shift here.
Namely, if working with multiple buyers, the seller (HR) would not share too much specific information too early.
Overall, however, the idea is for HR to get ahead of the deal pace so putting out a great deal of information when working with one buyer is more than helpful.
Moreover, the seller should predict the questions the buyer will ask (some sellers might have a questionnaire from when they were buyers; in such cases, the sellers should “turn” these lists on themselves to see how prepared they are).
Ultimately, these practices will make the deal dynamics less stressful down the line for the HR team.
What Role Does HR Play In Purchase Agreement and Transition Services Agreement?
When it comes to purchase agreements (PAs), Human Resources must talk to the buyer about what it will do with employees in the near future. The goal here is to protect the employees, which often requires collaboration with Legal. In most companies, HR is responsible for viewing purchase agreements for each deal.
Transition Services Agreements (TSAs) come into play when the buyer is not capable of providing some sort of service to the new employees or when there is a very short turnaround time in the deal.
For example, payroll is a common area where TSAs are needed.
What are Key Take-Aways for the M&A Practitioner Interested in Divestitures?
- Budget more time when working on divestitures
- Mentally prepare for a great deal of work
- Remember to act as a liaison – communication between departments is essential
- Look inward to identify problems early on before the buyer identifies them first
Though divestitures do not require the sale or integration of an entire company, they come with their own unique complexities. In addition, Human Resource departments play a critical role in the success of divestitures.
For best results, consider the following recipe: budget well, plan well, be consistent.