How to Plan a Divestiture from HR’s Perspective

I'm Kisam Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals today. I'm here with Jillian Cablesis, HR global Mergers and Acquisitions and divestiture manager at Caterpillar. She resides in corporate strategy and business development. She's executed divestitures to private equities and local entrepreneurs. US based and global as a small as 30 person company to nearly 5000 employees. Today we're going to learn how HR practitioners plan for and execute divestitures. How are you doing today, Jillian?

I'm great. Thanks for having me.

This is great.

You having fun at the conference?

Loving it.

We're here at the HR M&A Integration Roundtable conference in Chicago and having a lot of topics and discussions around HR integration. I thought it was pretty fitting to pick up a conversation around divestitures. Can you briefly discuss the larger role HR plays when conducting a divestiture?

Certainly. I think it probably is very dependent on the company that you're in, the HR department that you're in, the type of deal that you're working on, whether it's a stock or an equity can play a part as well and just how integrated or matric your organization is. For our case, we get involved very early on in the strategic and opportunity analysis phases. We'll have corporate development folks come and talk to us about a potential divestiture and then we'll work through each one of those phases through transaction development, all the way through to execution and then even stay connected for maybe a period of 100 days to make sure all the issues are handled and and taken care of before we're done with the deal.

Can you give me specific examples of what this involves?

Certainly with a corporate development team, early on they're looking for more consulting advice, right? Input on potential retention programs, what those might cost, other things that they might need to consider, governmental laws in certain countries, just any really considerations that HR folks are aware of that can give them insight into how the deal might be structured and then from there. Probably the biggest bulk of work in a divestiture for an HR team is putting together the data room. All the amount of information related to employee compensation plans, benefit programs, all that information has to be gathered and put in a data room so a buyer has something to review, can look through all that data and it is way easier to look at 100 different documents and analyze whether or not you want to buy a company. Than it is to actually create and develop 100 different documents about your own company and put it out there for a potential buyer to look at.

And that probably requires getting a lot of different departments involved and so forth. Are you leading that?

Primarily, yeah. So again, that's going to be different by organization. In my group we have, we play really a liaison role. I don't own compensation, I don't own benefits, but I liaison with those departments and gather all that information that a buyer is going to want to see. Make sure that we're putting in a format that protects employees privacy, that's not giving out too much information and put it in literally in documents that are appropriate for potential buyers to review and then that would be posted into the data room. So I can be working with anywhere from 30, 40 different contacts back within our own organization to get all the information necessary to put in the data room. What gets really complicated is when you add in multiple countries and different employee populations into that mix. So where in the US I might go to a US contact to get compensation information. In Belgium I've got to go to a different contact. If it's a Singapore organization, I probably have a different contact. So in a deal that has three or four countries, then the number of contacts, the number of SMEs you deal with in order to put together a complete data room just grows exponentially.

So a lot of nuances with local laws.

Absolutely. And really there I'm US based, so obviously that's where my more of my expertise resides. Then I would utilize some of our MA contacts in different regions to know what it is that we should be providing. And so again, I don't have to be versed in German law or in different country laws. I just have to have the contacts there and know the folks to help put together that information and then work on getting it to the data room.

Gillian, can you take me back to the very beginning? When should you start planning a divestiture?

My advice is always just as soon as you know that your organization is considering divesting or planning something is when you need to start working on it. What happens is even though a large divestiture project might take 12 months, 18 months, it's taken two years sometimes for us to completely be done and sell a business. What you don't know is actually how fast it could go. So if you would come across a strategic buyer and it makes sense that they want the business, you want to sell it, it can move very fast. The other issue that we've run into several Times now is we, when we weren't even really planning for a divestiture, we were thinking we were just going to close the facility in some state, maybe 30, 40, 50 people. We've decided to close it down. Once word gets out that we're closing it down, then perhaps a local entrepreneur, a strategic buyer, thinks that maybe this is a good option for them. And so where we're partially down the path of closing it, oh, all of a sudden now it's become a divestiture. And so then those tend to move really fast because you've already put plans in place, you've already taken steps to actually close the facility. So your actual sale process then has to catch up and it can move really quick. So the best advice is when you hear them talking about a potential facility closure, winding down a business or a carve out of a business, you want to start the planning right then that.

Makes a lot of sense. And I know one of the things that really interested me in our prior conversation was the difference between an asset and stock sale from an HR perspective and how that could actually influence the purchase agreement.

There's actually a lot of differences, not only in the HR realm, but tax and legal, when you're talking about an asset versus a stock sale. But from hr, there's really, I think, two key differences. And that is what happens to the employees and actually how you transfer those employees. So the resulting transfer process for those employees in an asset deal, the buyer basically gets to choose what they want of your assets, whether that's the facility where employees are located, equipment along, that is employees. So they're going to pick and choose what employees they think they need to run the business. On the reverse side of that, in an equity or stock sale, the buyer is purchasing a company. So you think of it as a fully functioning company with all the assets, all the employees, as well as all the liabilities that go along with that. So when they purchase that entity or that company, they're getting all the employees. And the transfer process is much simpler because employees then aren't being terminated from one company and have to be hired by another. They are subject to then the buyer's hiring processes, whether that is interviewing, background checks, drug screens. All that is avoided in a stock sale because the employees aren't actually changing. Employer who owns the company has changed, but not who that employee works for hasn't changed. So for that reason, it can be less traumatic, much smoother process for the employees to go through. It can also be beneficial to the seller because if the buyer Gets to choose who they want and they don't take everybody, then the seller could be left with stranded employees in a location where they have no business, no facility, no operations. And then you have to do a whole severance package to go along with that. So from a seller's perspective, a stock sale is a win win for the employees and for the company. The buyer, on the other hand, they may once more selection opportunity, they may want more choices, but usually the deal works out better for both sides. If it's a stock sale versus an asset sale.

That's interesting. Going back to handling local laws, does that come in play on top of that?

That's a really good question. It does come into play in other countries, especially so here in the United States. If it's an asset sale, it's just as I mentioned, employees are terminated. The new buyer will hire them. In other countries, they take a more protective view of their employees. So even though the deal would be structured as an asset deal, from a legal perspective, the government says you must treat employees to the best of your ability and they would come along with the deal. So you wouldn't necessarily as a buyer get to choose who you want or who you don't want. All the employees come along with the deal along that most times their terms and conditions, so what they're employed and under their employment contracts also come along even though it's an asset deal.

Wow. In our last roundtable they mentioned, I think it was ring circle.

Ring fencing.

Ring fencing. So in our last roundtable we sat on, they mentioned ring fencing. Can you explain what that is?

To me, certainly ring fencing is just kind of an industry terminology that's meant to say you've identified a group of employees that support this business and that you believe should be sold or divested with the business. And it's basically an invisible fence where you don't want people coming in and leaving that group because it could be detrimental to the deal. So if the buyer thinks they're buying a ongoing business, a going concern, and all of a sudden 10% of the key leaders or operational folks are no longer included in that, it could jeopardize your ability to sell that business because it's not going to be functional day one. So when we use the term ring fencing, it really just means that we want to put that invisible barrier around and ensure that we have the right people in the business so that it can be sold and it can be successful day one for the buyer.

When would you do that?

From our perspective, we do it very early. On almost in the beginning of the analysis stage, it'll get revised multiple times. Deal parameters might change. So we might be start out with a buyer who is looking at say the entire business and that includes three different countries. So our employee list that we're ring fencing or that protected group would be three countries. But we could go through negotiations and through that either tax implications, any number of reasons might come up and the buyer could say, well, you know, really I'm not interested in Germany anymore. I just really want these other two countries. So then that employee list that you have effectively ring fenced to protect, you would now then want to remove the German population. So it's going to ebb and flow throughout the whole life of the deal. But, but what you don't want to happen is too many folks to jump ship, right? That it is no longer a going concern. So you're going to do it early on with the expectation it's going to be a living document and it's going to be revised. But you have to at one point, usually right around the announcement time, draw a line in the sand and say, okay, we're done. We're announcing this publicly. This is the group of employees. This is what the buyer expects. And so this is what we need to deliver. Day one.

How do you handle the situations where employees may be between different groups or something of that sort? Is that something part of that consideration?

Certainly we've got a lot of different business units and we actually encourage movement between business units because it gives employees a broader view of the company and just helps from their development and from the company's perspective. So early on, when we were putting together those initial lists, we, we will identify any folks that perhaps are already in the process of changing roles either internally or external to that business unit. And with the help of the local Buhr, we'll let those continue to flow through. But you've identified them up front to say these are the ones that are in play. If it's not already in play, then we're going to discourage any movement between the business units. Again, we want to protect what it is we're trying to sell.

Gotcha. So you'll limit that movement at that point once you build that fence?

Absolutely.

What does a carve out process consist of? From an HR perspective?

Carve out can be really complicated, I think from all functional areas, not just hr. Because in essence what you're trying to do is take a population of employees that could be very integrated into your business and literally carve them out of where they are today so, so that they can stand separately, stand alone and function without the help of say the corporate support services. So it can be quite complicated not only for hr, but your tax and IT and all your shared services. But from an HR perspective we would have to figure out how are we going to do all the basic HR functions for an employee, how are you going to pay the employee, how are you going to provide benefits to that employee, how are you going to provide them, even the assets they need to do their job, maybe even security could be a shared service that if you're pulling them out from the mothership, so to speak, how can they function on their own? So it's basically trying to start up a new company. There was an example of a large carve out that we did that involved about 12 different countries and all but nine or three of those countries were already doing their own payroll and HR management. But in nine of those countries they were utilizing our shared services. From a company perspective, that's how you get economies of scale and it's more cost effective and it makes sense. So we had actually integrated quite a few of those countries and we then had to set them up with their own payroll providers, their own HR data management so they could stand alone and actually be sold and not rely on shared services or the company as a whole to provide those services.

That sounds like a ton of work.

It is a ton of work and that is definitely one that you want to start ahead of time. But it's also sometimes a guessing game when you're trying to decide how you're going to sell a portion of your business. If you're going to sell it to a strategic buyer, that buyer might already have capabilities to do all those things. They might have their own payroll, their own HR management systems, might have their own health care plans. So they would take your employees that you're selling and add to theirs. Then in that case you don't have to do a lot of work. If you're selling to say a private equity firm, then they do not have those same resources. And so that's when you have to have these employee bases be standalone, be able to be self sufficient. So sometimes you're starting down a path without actually knowing what the end buyer's going to look like. But it's one of those activities where you have to plan for the worst case, what's going to take you the longest amount of time and start down that path and then just be happy if you don't actually end up there.

What are the challenges of Working with union or represented workforce, as well as the workforces outside of the U.S. actually.

I would say that. I mean, there are challenges. There's challenges when you're working with any type of different employee populations, but it's not actually necessarily detrimental to your process. It is, though, something that you have to take into consideration that it's probably going to take more time because there's another group that you're either informing about the deal. And some of the countries around the world, when they have a representative workforce, you. You actually have to consult with them ahead of time so they get a say in how you're actually selling the company. So it can take longer, it can add additional work in there. But the flip side of that is because you understand in these other countries what it is that is expected. It's something that you can plan for in advance. And so you can build that into your timeline if you do your research ahead of time.

What goes into a communication plan and a divestiture?

All communication plans, I think when you're talking about mergers and acquisitions or divestitures are going to be key. There's so many different players involved that keeping everybody in the know and communicated to, I mean, takes on a life of its own. We actually put together a whole communication team that doesn't fall under HR even, because the communication activity is much larger than just hr. Obviously, you have your employees who are targets. You have your supervisors who may be targets. But then you think through. Even employees who aren't included in the deal that work with folks that are included in the deal are going to have questions. So you'll put together a communication plan for that part of the organization that's not even impacted by the deal. And then you can think through, well, what about your process partners, external companies, or external bodies that need to know about the deal and what is transpiring. So it's actually a work stream in and of itself because it can be so large. But one of the best practices that we found in divestitures over the last few years is to actually start communicating with the employees early on, much sooner than what we originally had planned to. Sometimes deal requirements prevent that. A buyer may actually impose on the seller some strict guidelines about when things can be communicated. So you always have to pay attention to what's been agreed to and what's in your documents. But if we're given the opportunity, we're going to start talking to employees as early as possible. We're going to set up FAQ sessions so that we can start answering questions. What we found is even if you don't know the answer, letting employees ask the question gives you an opportunity to research and find the answer. But it also helps them feel like they are not sitting there blindly. Right. They're helping get over some of their own anxiety by being able to voice what their questions are. So we'll hold employee sessions very early on. We keep a very detailed FAQ log and so every question that comes in at any of our employee meetings, our town halls that we will hold, we will make sure that that is captured, gets answered, and then gets fed back to the employees.

That's really cool you guys keep open communication like that, because I don't think a lot of companies do that.

Yeah, it's honestly the probably the least costly thing that you can do. You can keep employees informed and relieve a lot of their stress and anxiety by communicating, which cost next to nothing compared to waiting and trying to put in retention programs and plans when they've already been going a couple months without answers. They're already uncertain, they've already started looking outside for what other opportunities there are. So it just makes good business sense.

That's a really good tip for our listeners that are driving down 101. Encourage them to pull over and make a note to xx investments on communication and if you can, reduce it on the back end for retention.

Absolutely.

What are key materials that HR must prepare when it comes to diligence during divestiture?

The first step really is to define that in scope employee list. So where you were asking about ring fencing earlier on, that is why that is so critical. Because you don't want to start collecting data on employee population and have that employee population change through or four times before you're done with the deal. So identifying who's in scope ring fencing them so that stays stable. And then you start working on what does the buyer need to know about this population. And then you can start populating the data room with all that basic employee information early on. You probably have to de identify that information. So if you're working with multiple buyers, you wouldn't want to share specific employee information early on in the process, but you would do either an aggregated census of employee details or as I mentioned, de identify it to where you couldn't really tell the position, the individuals that are being referenced. But buyers need to understand what are you paying these people, what are their compensation plans look like, what are their bonus structures look like. Those details that are going to allow them to do financial analysis is really critical to get out there in the data room for them to use. Then you would also then follow up with benefit information. Your programs, your policies, really anything that's related to employees, you need to have out there for the buyer to review. Now, there's a couple different ways you can do that. You can put out basic information and then rely on the buyer to ask you what they really want to know. In our case, we put out a lot of information trying to get ahead of the ball, so to speak. So if we're looking to buy something, we actually have a request list we would send to a target 50, 60 questions long about information we want to know to help us look at what are the risks, what are the potential areas of concern, just to get all those employee facts understood. If we're looking at doing a divestiture, we're going to turn that same 50, 60 question list on ourselves and say, okay, for the group of employees that we're looking to sell, can we answer these same questions? So we would go through that exercise to populate a lot of data out in the data room in the hopes that when we do start entertaining buyers, we've already answered a lot of what their questions are going to be. And it's less stressful on an HR team, especially if you're dealing with employee populations in multiple countries. It can take time to get compensation information from Singapore or union representation information from Sweden. So if we do that ahead of time, that can keep the process moving forward. Once you do identify buyers and they start looking for what data you've provided.

Sounds like more work.

Divestitures are by far much more work intensive than an acquisition. And it's one of those. Until you've lived through one, you kind of think of them about the same, right? You think, oh, I don't have to integrate this entire population, so my work's going to be done closer to when the deal's done. But all you've really done is that integration, or the time it takes to do integration after you close an acquisition. You flipped that to the front of the process and said, okay, I have to get all this information ready ahead of the deal closing, because the buyer needs this information. So they're not any shorter, and they can actually be take longer. Because depending on how spread out your organization is, collecting data from multiple countries for different populations can take some time.

What's your involvement with purchase agreements?

Actually, there's a funny story along those lines. One of the first global divestitures that we were working on, we went through putting together the data room. You start having Management presentations with potential buyers. You start talking through what the buyer's going to be doing with those employees. We always try to get some protection for the employees for a period of time so that the buyer doesn't come in day one and slash compensation changes, the benefit plans. So one of the things that we would try, still a negotiation point, but we would try to get the buyer to agree to, is protecting those employees for a period of time, say a year, whatever that number is. One of the processes that we have in place within our company is that all the subject matter experts review the transaction agreements, the purchase agreements, to make sure it says what it is that the understanding is of that functional group. So when I was looking through reading the transaction agreement, I realized that it didn't say that they were going to protect the employees for that period of time. And based on several of the meetings, that was my understanding. So I pointed that back out to the legal team to say I didn't think the agreement was correct in this space. I got an email back that says, great, tell us what it should say. And the first thing I thought of was, okay, I'm not a lawyer, I'm not a paralegal, how am I supposed to write the language then that you're going to use in the agreement? And basically what they're looking for is paraphrasing or at least tell them what the expectation is and they would turn it into the legalese that it needs to say in the agreement. But it was just quite surprising when I got the email back and I'm thinking I can't write the legal language around in this agreement. But we are expected to review it. Sometimes that's a 60 page document and unfortunately they don't put all the employee related bits and pieces into one paragraph. You have to read the entire document to make sure that it is reflective of the deal as you know it and so that it can be accurate going forward.

Wow. So you're reviewing PAs on all your deals?

Every single deal, yeah. It is an expectation for sure.

Transition Service agreements, good old TSAs are sometimes required during a divestiture. Can you briefly explain what these agreements are specific, specifically what goes into them and what situations are required?

Certainly Transition Services agreements, they become necessary based on, say a short turnaround time in your deal. They can become necessary if your buyer isn't capable of providing some services and you want to close the deal and not wait three months, six months for that buyer to stand up payroll in a certain location. They become problematic just because usually a seller wants to close a deal, be done with the deal. They're not really looking for a tail out. So many months on, still dealing with the employees. But payroll is one that's more common just because it can take a bit of time to get that set up. And that one's not too difficult to provide. I actually have a funny story. One of my first real divestitures. Very early on in my role, I had done an acquisition. And in the acquisition, we had asked the seller to provide us a transition services agreement for actually payroll and benefits for six months because it was in a country we weren't set up yet to handle. And the buyer agreed and so we paid for it. Of course, that's the kicker there is the seller doesn't really want to do it, so they're not going to give you that option at a cheap price. It's going to come at some price that's going to discourage you from making them do it too long. But in this case, we'd done an acquisition. We had asked for a tsa. We had it, no issues. So doing my first divestiture deal, it was with a UK company, but we had about 8 to 10 employees in the US. Well, the UK company had no capability in the US. They didn't have any business in the States before this. And so they in turn asked us for TSA to manage these eight to 10 people just for two months while they got themselves set up. Made perfect sense to me. We had just done the reverse not too long ago. So I'm thinking, yep, we can do that. We start working through the agreement. It's all in the contract. And when it comes down to executing, I call and start talking to the payroll person about, you know, we need to pay these people for an extra 60 days. And their reaction was, we've never done that.

Wow.

In the entire, like her 20 year career with the company, she had never paid technically workers that were not employees. And so she was just like, I don't know how we do that, I don't know if we can do that. And so for me it was like a, oh, what did I agree to? And how is this going to be possible? So it took a little planning to figure it out, but we did, in the end were able to do it and it was entirely necessary to the deal because we had tried for almost two years to sell this part of the business and we didn't want to not sell it because of eight to 10 people. And so in the end it was worth it. But it was one of those Reminders that divestitures aren't exactly like acquisitions. And you should probably do your homework before you commit to anything.

It's a good lesson.

It was one and one I won't ever forget for sure what type of.

Transition records or data are required for HR to gather.

So from a divestiture perspective, if we're successful in selling the business and we're turning these employees over to a buyer, the amount of information that that buyer needs for those employees is going to relate back to the type of deal that you've agreed to. So we talked earlier about asset deal versus a stock deal. If it's a stock deal, that buyer now owns the company. So all the employees and therefore the employee's records that are part of that company now belong to the buyer. So you would have to prepare all those employee files or personnel records. Their i9 files could be their occupational health records. All that information the buyer technically is due because they now own the employees and the company. On the flip side, if it's an asset deal, the buyer is hiring these employees just as if they hired somebody else off the street. So the seller doesn't have the same obligation to provide all that back information. And it wouldn't be appropriate even say performance records, those kinds of records would not be appropriate for the seller to ask for them or the buyer to provide them.

What tips would you have for an M and a practitioner going through their first divestiture?

Probably budget two to three times more time than what the corporate development team tells you it's going to take. And just really prepare yourself for a lot of, a lot of work. It's a lot of liaison with other groups for sure. But it is definitely harder to turn the lens upon yourself than it is to review, say, another target's data. Because what you don't want to happen is you don't want the buyer to find an issue that you yourself hadn't already been aware of and at least taken steps to remediate. So there's a lot of inward looking, a lot of time in gathering that information. But in our case, we really need to be that go between from the business unit that is getting sold, the corporate SMEs that have information regarding that business, the legal team who's working through the due diligence process, the corporate development team that's working with the buyers on a potential transaction. We're sort of in the middle and need to keep all those constituents in our heads so that we can make sure that the deal progresses and the outcome is really the best you can do for the employees and for the business as a whole.

Budget. Plan well and be considerate.

A lot of work for sure.

Jillian, thank you so much for your time today. Enjoyed our conversation.

I enjoyed it as well. Thank you.

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