Virtual Summit Recap: Lessons Learned From Large Scale Divestitures

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I am Julia Rollins with Deal Room.

On our Client Success team again and I am here to introduce our next session. The title of the session is Lessons Learned from Large Scale Divestitures and our speakers for this are Galena Wolnitz, Managing Director at Virtus Partners, M and A Integration Separations Josh Beggs, Field CTO at Dell Technologies Gillian Cable Sisk, HR Global Mergers Acquisitions and Divestitures Manager at Caterpillar Inc. And Nitin Kumar, Chief Executive Officer at Appnomec.

Thank you so much for the introduction Julia. I am the moderator for this session. I am Galina Walanetz, the Managing Director at Virtus Partners where I lead our integration and separation practice. Virtus Partners, if you're not familiar with us, is a boutique advisory firm with a particular emphasis on supporting our clients in both the buy side and the sell side of M and A. I joined virtus partners after 25 years of experience in the corporate world, with 20 years at United Technologies Corporation where I had mostly corporate development roles and I led numerous corporate divestitures and the integration of an $18 billion acquisition. After that I joined Stanley, Black and Decker where stood up and led their integration management office that they had developed internally. So I think it would be fair to say that most of the topics of the last day and a half have been focused on acquisitions. Our topics focused on divestitures. Many of us in the corporate development roles had to deal with both of these types of transactions. And we all know that divestiture is not just the reverse of of an acquisition. You cannot just pull an integration playbook and do it in reverse. There's a lot of very special nuances that need to be taken into consideration when you're selling a business, and there's also not as much of great excitement or fanfare around the divestiture as they typically would be around integration. So while there is a lot less kind of glamorous task that is involved in divesting a business than an acquiring one, however, there's still a lot of value that could be gained from or lost if divestiture is not properly managed. We have an amazing panel for you today to help us delve into these topics and give you a few lessons learned and what to do and what not to do when you go into a divestiture separation. Nitin Kumar is the first one. He's a C level operating executive and management consultant with 20 years of global experience in the TMP sector and veteran of over 1000 deals helped CEOs, boards, PE investors and leaders transform their business models, leveraging disruptive trends in M and A. He has experience in all kinds of transactions ranging from classic consolidation, adjacency moves, technology tuck ins, new business model M and A, acqui hires, activist M and A, and hostile takeovers. He has worked with corporate and PE clients across M&A strategy, due diligence, integration and separation. Next up is Jillian Cable. 5th with over 30 years at Caterpillar, Jillian has various leadership positions at the company in Accounting, Human Resources and Six Sigma. Those experiences, along with certifications in HR and Project Management, served her well in her current role as the Global HR Manager and Acquisition Manager within Corporate Development and Strategy Division. In that role, she's responsible for all HR activities from working with business units and transaction managers on strategy and cost legal on contract language and negotiations and functional areas on execution through post implementation. And last but not least, we have Josh Beggs. Josh is a strategic Technology executive with a proven track record of leading digital transformation in education, media, publishing and financial services verticals. Josh has over 20 years of experience partnering closely with customer facing and back office functions to implement efficient and secure enterprise technology Solutions. During his 12 years with McGraw Hill Companies and most recently with McGraw Hill Education, Josh was responsible for leading many divestitures with specific focus on the digital portfolio and Technology aspects of the transaction. As you can see, we have a very diverse from a functional area perspective panel here today. It will be really good to delve into the topic of divestitures and we will focus some of this conversation in and around those specific functional areas. Before we get into that, I'd like to ask each one of you guys to tell us a little bit about your experience with divestiture. I'll start with Gillian.

Thank you, Galena. Doing divestitures is a fairly recent activity for Caterpillar. We had done quite a few acquisitions throughout the years and tended to hang on to everything that we bought. But probably about 10 years ago really got more strategic about our focus and started doing divestitures myself. I've done roughly about 10, from very small 20 employees, one location in the US to probably the largest one. It's about 10,000 employees and covered 24 countries. Quite a range there. All those different experiences that you mentioned, my background really come to play. Just like in acquisitions, things like project management, very key how closely you work with your corporate development team. That also comes into play. So I would say for me and the way we're structured at Caterpillar, I actually sit in the Corp Dev group and that has been really valuable.

Great. Okay. Nitin.

Hi, my name is Nitin Kumar. Particularly, divestitures have probably done 25 or 30 of them and they range from 100 million to a massive 130 billion. And each of them have different challenges. The configurations I work in is asset sales spinoffs, where you trade it publicly, where the carve out entity is publicly traded, carve out to private equity, and then both from the pitcher side, which is selling, and from the catcher side. I've almost touched every function with the exception of finance. And obviously HR is embedded, so I'm kind of okay with that. But I'm more of a front office and technology specialist. And on suppression management and suppression planning side. Looking forward to the session.

Okay, Josh.

Thanks, Galena. And thank you everyone. In my current role as field CTO with Dell Technologies, I've been consultative to a lot of Dell's largest partners in the New York, New Jersey and Mid Atlantic area, and that involves round divestiture. However, I hope to bring a unique perspective to this panel because I was part of a very large scale divestiture with McGraw Hill Education when they were purchased by private equity and spun off from the McGraw Hill companies. With a focus specifically on technology and the technology challenges, the application portfolio and divesting of that side of the business. I hope to Add some value and some color to the discussions.

That's exactly what we're looking for. So let's start with the kind of overall structure and how you would develop separation or divestiture program. Can you take me through the key components of a divestiture separation program? How would you generally approach the project structure, team and key phases of the program?

Yeah. Okay, so let's take a look at it. And as I said that divestitures come in different forms, right? You're a buy side and a sell side. In this one we're going to assume that you're on a selling side of it. Right. Standup is more complicated and we're not going to go into that. Even there you can have three configurations, right? You can have a complete asset sale there. You could do a carve out, you could do a spin off, you can do a car in of them, have a slightly different way of creating shareholder value. In principle, I think you need to look at five specific areas. When you look at a divestiture, right? The separation management part, how are you going to manage the separation? That includes separation strategy, separation planning, and this stems into how long the commingling or the entanglement has happened. Disentanglement is complicated. It's not this opposite mirror image of an integration. As Glena pointed out, the main issues come in the back office functions where the entanglement is high. So separation planning and separation strategy needs to be sort of very clearly articulated. And there are functions that you can entangle purely on a headcount basis. There are assets, there are contracts. So what is that optimal separation strategy number two is day one. And day one is not exactly the day one like you have in an eminent integration. That is when you own the asset and I need to go live. If you are separating into a spin off entity and that entity is going to be publicly traded, you almost need to march onto three day ones. You have a legal day one when you are in two different legal entities but still under the same umbrella operation. You can have a separation day one where you're operationally separate but the umbilical code of a TSA is holding you. And then there is a full spin day one when everything is cut and you're publicly traded. So depending on the configuration of a divestiture, you need to have the day one planning and execution done with stability, the ability to operate, or all the bells and whistles checked in. Are the employees going to be paid? Who lies where, which assets are on what balance sheet. So the day one is actually Absolutely critical. Because once you hit that milestone there isn't much room for going back. That's the other nuance which comes with the divestiture. The third one is transition services agreement. It's very hard to take a business that has been commingled for a long time and just say that oh, on Monday morning you guys are on your own. There are some support mutually and There are bidirectional TSAs where the parent and the spun off entity are dependent on each other. So TSAs have to be very well thought through. I'm sure we'll delve into TSAs. There can be a whole body of knowledge around that. There is the whole customer impact piece of it, which customers are comingled, what ip, who communicates where and then human capital, which I think we have, Jillian, who will go into this. So there are five bodies of work there in terms of how you structure that. A couple of other interesting things which you don't come in and see in M and A integration are dissynergies and stranded costs. Right? Stranded costs are something you got to plan with, otherwise they can come and hit you pretty hard. These are the ones that create diseconomies of scale. For example, you have real estate meant for 10,000 people and you have designed them for a certain economy of scale. Now Suddenly you have 2000 people out your cost per employee and all those KPIs and metric goes up and you're left with those stranded costs. And that's not necessarily for real estate. It can be for your licenses, it can be for call center, it can be for anything. And then you have dis synergies which means how much am I losing in terms of combined customer pipeline or sort of my accounts payable or contracts being mingled? How much dissynergy is going to be created? And that's not necessarily operational. You can have several dis synergies come in from tax, right? Let me give you an example. Once I was doing a very large multimillion dollar divestiture. There were 5,800 entities combined together for probably more than three decades, completely optimized for tax. The moment you touch and separate them, the whole tax structure used to blow up and you used to get billions of dollars of dis synergies. So don't think about it dissynergies as purely operational. There are financial, legal and there are many complications. So you need to think about separation management as these bodies of work. Now depending on the size and complexity, you can configure them by function or by complexity or separation drivers. If you're from the M and A integration world, you know, value drivers here are called separation drivers and stand up drivers and quick paths to value creation and stability. Those are the big ticket items that you need to sort of take a look at. And this is all about creating value. Again, it's not subtraction, it's creating subtraction, but it's additive value that's been created. So think about it that way. You're still accountable to the shareholders, you're still accountable to the boards, you're still accountable to your customers, people and regulators. Right. None of that is off the hook. So you align and optimize these body of knowledge to align with the end goal of the divestiture.

That's great. And we'll talk a little bit more about value creation from divestitures. You know, your, your discussion almost sounds like why would we ever want to divest anything? It just seems like it's fraught with so many issues. But Gillian, how do you guys in HR fit into this equation and what are the some of the key pillars that you want to look after from HR standpoint?

I think that probably is somewhat dependent on your company makeup, your structure in addition to all those things that Nitin said about, you know, is it an asset deal is the carve out? Right. So the to be different for the different types of deals. But in general from our perspective at Caterpillar, with me sitting in the corp dev, that allows me to get involved very early in the strategy and analysis phase. That's really important because you can get the deal strategics, numbers and financials all looking at one thing. To Nitin's point, tax may be driving you one direction or a type of divestiture and you need to be able to inform them of the actual people side of that transaction. What is the impact of them doing a stock sale versus the asset sale, especially to the perspective of stranded costs that Nitin had mentioned. So for us, we get involved in the strategic phase, we help inform on what the actual deal structure is going to look like and then we're in every phase after that. Right. So we're helping prepare the data room were responsible or expected to review all the legal documents from the purchase agreement to if there's retention documents, all of those documents, as well as meeting with prospective buyers. Right. Talking to buyers about the employees, your payroll systems, all those back office functions and then actually completing the deal. So any closing requirements, all of that is done in addition to more or less the administrative work of well, you're actually transferring the employees now. I mean, as much as you can be, HR can be in all those phases throughout the plan also may mean that, you know, you're on a deal for 12 months, 18 months, two years from start to finish. But from my perspective, it really makes the actual disentanglement and those that work at the end easier if you've been involved from the beginning so you don't have those surprises and you've helped actually drive the path as opposed to getting handed something that you're meant just to execute.

Yeah, I think those are typically true for both acquisition and divestiture side. Right. I mean, the earlier that integration team gets put together and pulled onto the transaction, obviously the better and the benefits are clearly there. But inevitably the corp dev team seem to be reluctant to do that in some cases. So we've always having to kind of fight through that a little bit. So, Josh, how about from a technology standpoint, what are some of the things that you kind of focused on largely on the divestiture side?

I am somewhat biased having a 20 plus career in technology, and no disrespect to my fellow panelists, but I think technology is one of the most complex sides of a divestiture. Nitin mentioned it earlier. The role technology plays in the divestiture varies greatly between whether you're on the selling side or the buying side. And the theme in technology for the past 20 years has been consolidate, consolidate, consolidate, drive your efficiencies out. So what that has led to is a technology entanglement. Quite frankly, most companies, including my own at the time, aren't aware of all of the interdependencies that those technology platforms have on each other. So that drives that complexity up even further. And we'll go into that a little later. But a couple key things when you think about it from the seller perspective, you have to be focused on those stranded costs. You have a business operation commitment to your customers, both internally and externally to continue to run. So a seller perspective is typically like, okay, we've divested, let's get this entity out as quickly as possible without any disruption to our current operations. However, in the buyer side, and I've had the privilege to be on both sides in the buyer side, you have a commitment to the customers that you're pulling with. You're not really concerned about the stranded cost. You're more concerned about setting up a new environment and that stand up in the most efficient, affordable manner. Make the commitment to the buyer, the buying entity, depending on your perspective which side you may be on during a divestiture, your role in technology will vary greatly. But at the end of the day, it's a complex topic and tower to address and one of the most critical because again, technology plays a part in every side of the business today. Whether that's just your end user compute responsibilities to make sure your internal employees are up and running, or most importantly, your paying customers don't notice what's happening during this divestiture.

No, absolutely. And I couldn't agree more. I mean it's certainly one of the most complex one and I will also say one of the most costly aspects of the divestiture. So the ability to fully understand the costs that are involved in doing the full separation of technologies is something that I would imagine a body like SMO Separation Management Office would want to be paying real attention to. So with that nitin back to you, is there a need for something like an smo, kind of the equivalent of IMO that we would have on the integration? What is their role? When do you get them involved? Kind of. How do you think about overall program management for separation or divestiture?

Yeah, so I think it is not exactly like an integration management office, but it has some very good similarities with them. Right. So the SMO has got very different levels of involvement. Sometimes the leader is nominated from somebody who's in the sell side diligence.

Right.

Or the separation diligence, depending on what terminology you use. And I would think about it that there is always a steering committee that is spot, which is from the executives of both places. Think about them as the air traffic control. Okay. The SMO is the guy who's flying the plane and the functions are like wing. And if the coordination breaks, you know what happens when air traffic control governance and the pilots are not in coordination? Right. That exact same disaster can happen here. And I think we've seen that movie many, many, many times in a separation management office. You are also looking at what am I planning, what am I next 10 days looking at what am I going to do, what are my risks, what are my mitigation plans? And then I always tend to kind of take risks into three categories. There are business risks, there are execution risks, and then there are risks called transactional risk. If something happens like a crazy dis synergy and stuff like that, it can derail the whole transaction more often than not. People are myopic in their functions and this is no disrespect to them because they're running at 200 miles per hour. They don't see all the risk and they don't see all the interdependencies, right? So somebody has to do A, and then B happens and then C, you find out there's a technology dependency, four, there's a tag dependency. So SMO has to aggregate all of them, quantify the risks, make sure they're executable tactical plans. It is the glue between strategy and execution. And I'm telling you literally you need to have your eyes, ears, 10 other eyes and ears open. It's like no different from flying a plane. And one mistake, it can be leading to, leading to literally development of the transaction. It's also smo's job to understand what am I going to do with a level of entanglement or separation. Especially can I get rid of all this on the other side? Okay, now I don't have resources to catch this, right? Can I outsource some of this? Also the separation strategy, you have to stand up and ask the questions. And to your point, the cost is not understood. It's very easy to stand up and say, hey, copy and clone everything and go there. Either way that a different cost. So can you do a lift and shift? Do you have all the bells and whistles in place? Do you have ability to test, ability to roll back? Do you have the right resources in place? So it's about bringing the whole ship together. In some ways it's similar to the integration management office. The difference is that in integration you can go back and reverse certain decisions. In separation, once the deed is done and you're past a certain place, there's just no reverse gear. You just have to go forward and then navigate yourself through. Right? So that's the big difference here.

As you're talking about kind of bringing the whole shift together. Let's talk about communication throughout the divestiture process. What is the role of communication? Who are the key stakeholders that have to be communicated throughout this process and when should you start it? I know Divestitures is a transaction that is typically tried to be kept under wraps as close to divest as possible as to not to create this massive, you know, rumor mill and other things for the employees that are ultimately would be divested. However, on the other hand, you want to be transparent with employees as much as possible so that you can develop an action plan around a potential flight of employees and other things. I guess the question will start with Gillian, talk me through how do you think about communication and all of some of these aspects of that.

Certainly I think sometimes a misunderstanding is that Communications is owned by hr, right? Granted, if your only communication folks are in hr, then maybe that's where it started. But actually, especially in any divestiture of any size, you want communication really to be its own work stream, just because of like one of those things you mentioned, which was stakeholders. Certainly you've got the employees as stakeholders, but they're usually actually further down the line than you might think. Before you ever get to talking to employees about it, you may be having to talk to your executive office, may have to get internal approvals, and then really you need to think about everybody who's impacted by that divestiture. So you got customers that are going to be impacted because you're selling something off. In our case, we have dealers, huge, huge stakeholder that we have to consider early on in a divestiture and develop communication specifically around them. So really, having a dedicated work stream for communications, I believe is key. HR will be a part of that, obviously, because employees are going to be a key stakeholder and we're going to want to develop and write the communications. You also may have to have communications to the external market to shareholders, and that so really key, I think, to have its own work stream. In some cases, you said that, you know, you need to keep things confidential. That's absolutely the case. Then in that situation, we would use non disclosures, you know, talk to the people we need to talk to and plan early, have non disclosures in place. I've actually done two very large ones opposite.

Right.

We had one which literally up until sign, we had an insider group. It was managed very tightly. Everybody who was on the project signed NDAs. And so it was very key to keep those communications confidential up until we were ready to sign. On the other hand, we did a divestiture. It was a second one in the business unit. The first one had really the employees didn't react well to it. So there was a lot of angst throughout the entire business unit, even the part that was not being sold because of how that one was handled. So when we got ready to do part two of what the strategic plan was, the decision was made that we would not keep it confidential. We would be upfront with employees. We would try to hit that issue head on as opposed to react to it the way we had the first time around. So I would even say communication strategy can change. And that's why deciding what that is early on and who's going to lead it is very, very critical.

Yeah, I agree. I mean, I think it's a really good point on Having the plan that revolves around that particular situation. Because in many I have been involved where your hand was sort of forced by the fact that the CEO already talked about it at an earnings call or one of the investor meetings and said, hey, we're considering strategic options for this business. And what exactly does that read through to the employees? Right. And in advance of that statement by the CEO, even as they're considering options, you got to develop a workable communication plan to the employees, to your customers, to your suppliers and other things. Nitin, how about you or any additional thoughts on this?

Gillian made some really good points and I see them as seven or eight different groups depending on your industry, right? And you have the investors, you have the board, you have the suppliers, you have regulators, sometimes depending on the industry and the asset, you have obviously the customers, you have employees. And then all of that, right? In particularly, you can go into micro segmentation as well. Different types of customers, different types of employees, location and all that stuff. So as much as this is strategic, a communication plan is also very tactical. You need to get into real brass tacks. What exactly is changing for this person? You can't leave it like, oh, this is changing for Galena and this is changing for Josh. You need to get into real specification. Is your reporting line changing? Is your location changing? Is your incentive changing? Are the systems and processes changing? What are you going to have? What are you not going to have? So you need to get real tactical. Even when you say customer communication or employee communication, the impact may be very different in location A versus location B, type of customer versus not, and on all of that. And then in a technology, depending on the sla. Also, can I even meet this SLA given I am a much smaller size.

Or whatever it is?

So there's a lot of that. And you need to come to a very tactical plan. Who's the source of communication? Who's the target audience? Am I going to give a medium of communication? Am I going to do a webcast individually? Call them? Am I going to do this? What's the most effective way and what's the frequency that communication plan has to come together. And I agree there has to be a communication work stream and I've seen three configurations depending on the divestiture. It's SMO led, HR facilitated, function owned. It can be function led, HR facilitated, SMO sort of governed. And there's no right or wrong to this. It really depends on how complex your stakeholder communities, how granular you're going and really who is the most effective Person to facilitate versus lead versus own. Right. It's a race. So this has to be thought through upfront in the separation planning. And again, and I repeat this, this is not just strategic. It has to come down to brass tacks, tactical. Otherwise, it's not really effective.

Right. So let's talk about a particular situation that I think are unique to divestitures and is not really a topic that would arise in integration. For example, I have observed in numerous divestitures where there comes a point in a transaction where the employees of a business that is being divested sort of change their allegiance or terms, so to speak, and become more aligned with the seller. So they see the writing on the wall and saying, well, look, a month from now, I'll be employed by this other company now. And therefore, you know, all the activity that they were doing in support of you as the seller now becomes a little bit more kind of arm's length and less collaborative. And, you know, so start developing these kinds of issues between either the leadership or the employees themselves. They're not as supportive of what you're doing. They want to align themselves more with the buyer. Have you seen this before? And how have you handled something that gets questions from Josh?

I have a unique perspective because I was in a situation where I was part of the selling team architecting the divestiture and then had an opportunity to move to the buyer to stand up the new organization. Probably one of the most significant lessons learned is if you believe that the relationships that you forged over the years will be good enough to get the divestiture done, you can't rely on that.

Right.

Relationships always have a play. However, as you just mentioned, as the buyer and the seller start to build their new culture and development plans with hr, people start to realize that, you know, I have an allegiance to the person who's paying me. Right. No matter how much Nitin may like me, I can't rely on Nitin to kind of go outside of the bounds of his company to help me as the buyer stand up my company. What I would suggest to everyone is the key here, and we'll talk about the tsa, but the Transition Services Agreement is absolutely so critical in the world of technology. That outlines everything from when we talk about tactical needs of the divestiture, something as simple as who owns the IP addresses of your systems. That is a very complex and quite argumentative at times within companies that are going through divestitures. So it's just one example. There are hundreds. But what I would say is make sure the focus is on the tsa. And also outline the RACI up front. Outline it for your technology towers. Outline it for the buyer and the seller. So everyone has an understanding and agreement going in what their roles will be in playing through the separation. If you do that up front and get the hard conversations out of the way, trust me, there will still be challenges, but it does make it a lot easier. And like I said, the cultures change. Nitin and I were on the same team and we're trying to score in the same goal, but now we're not and doesn't necessarily make us competitive. But Nitin might be playing on a different soccer field than I'm on, and as a result of that, he's worried about his company and his goals and I'm worried about mine. So we have the hard conversations up front. We outline that Gracie together. It'll make sure that we both can be successful through the operation.

That's great advice. So let's talk about those transition services agreements. How should each function approach developing a list of services that will be necessary to support the buyer over the some foreseeable future post transaction close. Who should take the lead in developing that list? I've been in numerous acquisitions where at times I'm the one that's leading and pulling the information from the seller about what services do they think we're going to need from the acquired company and from them to support the acquired company for a period of time. And it just comes to them as such a shock that is required or needed as part of overall transaction documentation and other things. So who should be leading this and kind of how should it be stood up?

Yeah, look, TSAs are very complicated as we all agree. Right. They fundamentally start with an entanglement workshop from both sides. Right. I mean, obviously the divestiture has a function lead and they truly reside in the function because the separating function and the standard function have to own it.

And live with it.

Number one principle is that TSA is not a revenue stream, okay? You just can't think about it that way. It's just a necessary thing to have so that you're sustainable and the business doesn't have service disruption. And don't sort of think about it as I'm going to penalize people. You need to go in with an open mind, number one. Number two, it needs to be very clear. Right. I can't be a TSA around a specific individual. Right. This is the second mistake I've seen. Hey, you know, I like Galena because she's the only one who can do this job and no, there's a relationship there. And this is just going to disrupt the whole thing because my customer is interacting with her. Now you have to sort of be a little bit dispassionate there and say, okay, what is the scope of services? Right, right. What am I trying to accomplish there? What are the key activities? Who is it delivered to? What is the frequency of this thing? Is it like on a monthly basis? I need it on a weekly basis, daily basis? Is it the number of calls and all that kind of stuff? Right. Then you have, what is the cost? Is it headcount? Is it more than headcount? And then go a little more granular on when we take off the tsa. It's pretty critical to agree that getting into a TSA is a lot easier. Right. What are the boundary conditions to separate that tsa? Because people can A, use this as a revenue stream on this extreme and B, that extreme. You know, I have this thing, so I have no urgency to separate or stand up. Right. You can't get into that. The common goal for everybody here is to be incentivized to get off the TSA at some point in time. It's not a crutch given to you forever, which is why the cost is important. And I have seen companies be very benign and be friendly to each other and say, look, if you need it for another 10 days, I'll give it to you. That's not a problem. And the other extreme, no, guys, I'm going to be listed on the stock exchange. I just didn't know thing and I'm.

Going to penalize you.

There is a middle ground and you need to agree with that. These literally needs to be SML facilitated, but actually the functions have to own it. The other way around is not very effective. And I've also seen companies swing across the allegiance and Josh and Nitin, who are friends, are there and they agree. Let's bring in a neutral part, be it a consultant or somebody who facilitate that so that there's some objectivity into it and we all need to be good corporate citizens and be fair. Right. The second important factor is that there are TSAs that you miss. Then this process becomes irreversible. Oh, you didn't give it to me at that time and you didn't give it to me at this time. And that conversation is generally counterproductive. By then it's done. There is a master service. There's a sort of a master agreement. There is a tsa. There is also something called A good faith or a good cooperation agreement. Right. In which, okay, if I need to be audited by you or you need to be audited by me, I'm going to give you access. So whatever is not covered in that tsa, there's a good cooperation or good faith agreement that is put in place. Please make sure that all these agreements, which can be quite numerous, all hang together and there are no contradictions so that nothing comes in. It's very rare that people sue each other and take each other for court, but I have seen that movie too. So literally owned by the functions. Cope it go as tight as possible and then just be very clear, our end goal is to get out of a tsa, not stay in the TSA or make money or stay. That's actually the biggest thing here.

Yep, that's great. Gillian, what are the typical HR related TSA services you observe in these transactions?

They can be for any number of things, but I'd say probably the most common would be some type of payroll arrangement. Right. The buyer needs time to set up their own payroll, vendors, their own systems, and so they'll ask for a TSA for a period of time so that the employees are paid while they're doing that. Benefits not so common just because of the lease. In the us the regulations around multiple employer plans, we try to avoid them at all possible. We don't want to get into them. It's a whole nother work stream of managing it. It goes beyond when you like to be done with the deal and done with the part you're selling. But if you do have to do them, then yeah, it's key to have in there your requirements for when it's going to end. You can put in an escalating fee schedule so that, you know, you can say, hey, the first 30 days it's going to be relatively cheap. It's going to be at our cost. We want to help you get started. We know that you need it. So it's going to be just our cost the next 30 days. Bump that up and going to have some kind of administrative fee added to it. You need it for another 30 days now it's really going to start to cost you. So want to make it worth their while to make that a priority. Actually, I have a really quick funny story, a lesson learned, if you will, about TSAs. My first divestiture I worked on was from the UK. We had US employees included in scope and these US employees were actually on what's called a me too agreement. So they weren't Union, but they had all the look and feel of being union because of their. Where they were located. You know, UK buyer is unfamiliar with that, needed. I think it literally was just like 60 days to be able to get that up and running. We'd been trying to sell this company for over two years, right? So it's like, oh, you need a tsa, no problem. That that's an easy one for us to do. Because on the other side, when I'd been doing acquisitions, I had asked for the same thing, right, in several different scenarios. So literally, I did not think twice until I called and started talking to my payroll contact and said, hey, this is what's going on. It's only six employ, but, you know, we're going to term them on this date, but we need to be able to. And they literally like the longest pause on the phone where nobody said anything, and I'm going, okay. And they came back and literally they're like, I've been in payroll for 20 years and we've never done it. When you're talking about we have no idea what you're talking about. We have no idea how we do it. I mean, they just literally was like astounded that, you know, I literally myself this HRSME had agreed to do something and they had never done it before. Now, in the end, when you really talk through it, literally, it took about two meetings and we figured it out and everything went smooth. But I can tell you that lesson learned, you don't assume. You don't assume just because you asked another company to do something that you can do the reverse. So it's just another point to say divestiture is definitely not an integration in reverse.

Yeah, no, absolutely. And I really love your point about putting in disincentives for them to stay on longer on the tsa. So escalating fees, I think those are great, great advice for anyone trying to stand up TSA agreements and then hopefully quickly get off of it. Let's talk about value generation from divestiture. So it's very kind of common sense and we talk about all the time on, even in the last day and a half about value generation from an integration. And those are typically something that's relatively simple to identify, kind of develop some KPIs around. It's relatively simple to track. I imagine that each functional area can go and dig deep and think about what value they're drawing from this acquisition based on the strategic rationale of the acquisition to begin with. Some kind of synergies from duplication of Efforts that could be now rationalized on the reverse, I guess, on the divestitures, there's still value to be generated for the shareholders or for the owners. How do we think about those? I guess I'll start with Josh. What are your thoughts on kind of how do you think about value generation from a divestiture?

So I think it's important, especially speaking from technology, that there are a lot of assumptions made in value generation. Make sure that you understand what, say, either the board or the C suite's goals are for that divestiture and what their assumptions were if they haven't brought, you know, if you haven't been asked to contribute to that. For example, does you know, reducing 2,000 employees from an office generate value? Well, it could if you have the ability in your contracts and technology footprint to reduce along with it. Otherwise, it's just creating stranded costs that Mitten referred to earlier. So I think it's really important to look at that. There is definitely value to be had from a technology perspective. Collapsing your IT footprint in a data center, collapsing the number of licenses that you may buy to support your operations, simple technology development, headcount, and other things that all are direct contributors to helping reduce costs from a seller perspective. But I've seen more times than not that assumptions are made in that value generation from the seller perspective that don't necessarily play out in the time frame that they expect due to the complexity of the contracts that underlie your ability to scale up and scale down some of those costs. When we talk about the value generation, my guidance would be make sure you're involved. Make sure you understand the expectations of the board or your C Suite, understand how they made those assumptions, and then contribute your own perspective, from a technology perspective, at least contribute your own, you know, goals and feedback, and then report early enough on your progress. Give them transparency.

And I agree with everything Josh said. Right? There's no subject for aligning with the board and shareholder expectations and all that. Having said that, even before you go into a divestiture and check value drivers, you need to align and look at the strategic rationale and what are the levers, right? They're really coming from commercial, operational, technical and financial standpoint. Right. I won't get into each of these, but I'll give you an example. When you say commercial and you look at a big conglomerate, JJ or Unilever or something, sometimes they crush the brand under the mothership brand, right? And these brands, once they go out or become more valuable, so there's a commercial angle to it. You have more ability to change the pricing and all that stuff. On financial, it's interesting, sometimes those cost structures at the corporate allocations kind of burden and crush the business unit. So there was a particular divestiture that I did and everybody kept saying this thing is a dog. It's like 10% EBITDA business, da da da da da. Once those corporate allocations just go away, it went to like 27% EBITDA business. Suddenly this thing was the star. You just changed the posture. And then you get, okay, fine, you crush this thing inside your portfolio. So is this more valuable to somebody else? Right. And then from an operational standpoint also this is the, you buy a startup, you crush it and technology companies are notorious, right? You take these software companies, you crush the soul of them and then in three years you divest. So you hit the secret sauce, which is speed to market, ability to make decisions, go quickly, execute on things. So sometimes you have those private equity guys come in and say, hey, look, look, I think I can create a lot of value. So you understand those value drivers pretty clearly on what needs to happen there and what's the driver? I'll come back to another framework. There's only four elements that create value. It's the brand, it's a particular customer segment. And that can be an industry, a vertical or a geography. Okay, There is a specific product that really happens and the channel. Right. Your most interesting configuration is your most profitable products are in the most cost effective channels, hitting the right customer segments and your brand has good resonance. There's the exact opposite and everything in between. Okay, so your worst case scenario, you need to turn into either a mid case scenario or a best case scenario. Now whatever is your primary reason, either it's a channel, a brand, a product or a customer segment. You pick your primary. All the other three have to rally very quickly behind it. If it's a brand, then your customer segments have to be right, your channel has to be right, your product has to be right. Just make sure what is your pivotal point and then rally every other function value driver lever behind that to create shareholder value. And in those kind of things, you do not configure your SMO by function, you configure them by value driver so that you can execute better.

Perfect. So what do you do? And have you ever observed, I guess, a situation where you are managing a divestiture and you observe that there is no real integration plan that is being developed on the acquisition side and there's not a real IMO that has been Stood up or no one's kind of approaching it from overall integration management standpoint. Have you encountered that? And if so, kind of how have you handled something like that?

We have run into that, I think probably at least three times I can think of myself. And that's, I don't think uncommon if you're dealing with inexperienced buyers. So say we're selling a 300 person facility in Iowa, right. And some local Iowa company is buying it. So they're not global, they're not worldwide. This might be their first time doing it. We actually will end up putting together a work stream which is really working with the buyer on standing up the deal. It sounds like a lot of work and you should be able to, you know, just done with it. But a lot of times when we're doing that in our business, that's going to become a supplier to us. Right. So it is critical to our business that they're successful. So we're going to do whatever it takes to help them be successful. So we will actually put a work stream together where we are. Integration work stream. Right. Running side by side with your divestiture work stream in order to help that buyer stand up, all the vendors they need, the processes they need. And a lot of times you're literally driving it because you're telling them, yes, you've got to get this set up. You know, it's going to take, you know, this long for a 401k vendor to get set up. So you need to start that now. And then we will continue, we will stay 30, 60 days after that close just to make sure that the employees are taken care of and everything is running smoothly before we actually start to back out. So it happens more often than would think would.

Yeah, no, absolutely. I have certainly observed it and we've handled it a similar way. I've almost had to coach my counterpart on the virtues of having a structured and robust approach to integration. And they would inevitably be very surprised to hear that. And so you try to help them through it. And to your point, it's in your best interest that that goes well, that they're fully set up. There's not a massive exodus, you know, of employees from the company after they acquired. So I think it's something that definitely should be considered to be done by the divesting company as well. What are the red flags that you observe that your divestiture is going off the rail? Kind of. What are some of the things that you want to quickly observe and then jump on to ensure that you course.

Correct that I think that ties nicely into the previous question as well and that is make sure that as you're going through a separation that there is an SMO established on both sides. Right? The buyer and the seller have the escalation path, have a cadence for regularly reporting progress on the agreed upon plan that allows you to at least keep a pulse on the various work streams, understand when those things are going off the rails. It gives you insight to that early and then you can try to course correct. I've seen multiple red flags in the biggest challenges I would say, or the largest problems that the companies have gotten themselves into is where they've over committed and under delivered. Right. And I always like to say to my technology organizations we always should under commit and over deliver. I think it's very critical to make sure that there's transparent in the budget, transparency in the work stream plan, that is with dates and milestones and then a cadence of regularly reporting progress. Anything that shows up, missed meetings, missed dates. Don't think that there is the ability. You're in a year long divestiture plan and in the first month somebody's missed a date and oh don't worry, we can reschedule it. Well, all of a sudden now your plan starts to get backloaded. It's a huge red flag. If you start seeing early dates missed, raise the flag. You start seeing budgets missed early raise the flag. And there are a lot of other nuances in each of the technology towers, but I'll pause there.

That's great. A really good conversation guys. Thank you so much for the panel. Very insightful. Isan, thank you so much for the opportunity to moderate this session and appreciate everyone's time.

Thank you all. We enjoy that.

Thank you.

Elena, thank you so much.

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