On this episode Kison speaks with Jillian Kaebel-Sisk, HR Global Mergers, Acquisitions, and Divestitures Manager at Caterpillar.

Jillian's current responsibilities include corporate strategy and business development. This M&A Science podcast covers how HR practitioners plan for and executive divestitures.

Kison and Jillian talk about the critical factors to consider when planning for a divesture.

They also discuss carve-out and divestiture challenges, as well as TSA agreements, asset vs. stock sales, due diligence, and more.

Introduction and Jillian’s Background

Jillian Kaebel-Sis is an HR Global Mergers and Acquisitions and Divestitures Manager at Caterpillar who resides in corporate strategy and business development.

She’s executed divestitures to private equities and local entrepreneurs, US-based and global, as small as a 30 person company to nearly 5000 employees.

HR’s Larger Role During a Divestiture

I think HR’s role is very dependant on the company they are part of, the HR department, the trend, the type of deal, be it a stock or equity, as well as how mature the organization is.

After that, it is important to make sure to work through each one of the phases, through transaction development and all the way through to execution.

We stay connected for a period of a hundred days to ensure that all the issues are handled and taken care of before the deal is done.

Specific Planning Examples

Early on, the corporate development team is looking for more consulting advice, input on potential retention programs, what those might cost and other things they might need to consider, such as governmental laws in certain countries.

This includes all insight an HR can give them into how the deal might be structured.

From that point onwards, the biggest bulk of work for the HR team is putting together the data room, which includes information such as that related to employee compensation plans or benefit programs, which essentially serves for a base for buyers review.

Me and my team, we make sure we are putting in a format that protects employees’ privacy and ut this in documents that are appropriate for potential buyers to review, which ultimately gets posted in the data room.

In a deal that has three or four countries, the number of contact and estimates you deal with in order to put together a complete data room simply grows exponentially.

When to Start Planning a Divestiture

What happens is, even though a large divestiture project might take between twelve to eighteen months, sometimes it takes around two years to sell a business, so you don’t always know how fast will the process unfold.

Another issue I have come across is that there were times when I and my team weren’t planning for divestiture, expecting we are going to close the facility, only to have a local entrepreneur or a strategic buyer show the interest in the facility.

In these cases since the team is already down the path of closing it, it becomes a divestiture and what remains is for the sale process to simply catch up with those plans, which ultimately moves quickly.

Therefore, the best advice I can give is to start planning as soon as you hear about potential facility closure, winding down a business or a carve-out of a business.

Asset vs. Stock Sale

There are a lot of differences, not only in the HR realm but tax and legal as well when talking about asset versus stock sale.

From an HR perspective, there are two key differences and that is what happens to the employees and how employees are transferred.

In an asset deal, the buyer gets to choose what they are interested in regarding the assets, be it the facility where employees are located or equipment, along which are employees so the buyer gets to choose what employees they need to run the business.

However, in equity or stock sale, the buyer is purchasing a company, with all the assets, all the employees and all liabilities that go along with that. In this case, the transfer process is much simpler, as employees aren’t changing employers - the only thing that has changed in that regard is who owns the company.

This can also be beneficial to the seller because if the buyer gets to choose which employees they will keep or not, the seller can be left with stranded employees in a location where they have no business, no facilities or no operations.  

So, from the seller’s perspective, a stock sale is a win-win situation, both for the employees and the company. The buyer may be interested in having more selection opportunities, but overall, the deal works out better for both sides if its a stock sale, versus an asset sale.

How Local Laws Affect Asset and Stock Sales

In the United States, if we are talking about an asset sale, employees are terminated and the new buyer will hire them.

However, in other countries, there is a more protective view of the employees, so even though the deal may be structured as an asset deal, from a legal perspective, the government says it is a necessity to treat employees to the best of your ability and they would come along with the deal.

Most of the time, the terms and conditions from employment contracts also come along, even if its an asset sale.

About 'RingFencing'

Ring-fencing is an industry terminology that implies that you have identified a group of employees that support the business and that you believe should be sold or divested with the business.

For example, if the buyer thinks they are buying an ongoing business and suddenly ten percent of key leaders or operational folks are no longer included in that, it could jeopardize the ability to sell that business as it is not going to be functional day one.

Ring-fencing means putting an invisible barrier to ensure all the right people in the business are included so the business can be sold and be successful day one for the buyer. This should be done early on, preferably at the beginning of the analysis stage.

Managing Employees From Different Groups

We have a lot of different business units and we encourage movement between business units because it gives employees a broader view of the company and helps in their and the company’s development.

Early on, when we are putting together the initial list, we identify folks that are in the process of changing roles either internally or external to that business unit and with the help of a local BU HR, we let those continue to flow through. If the movement is not already in play, we discourage any movement between the business units.

This way we are simply trying to protect what we are trying to sell.

Carve-Out Process

Carve-out can be really complicated from all functional areas, not just HR. This is because in essence, what you are trying to do, is take a population of employees that could be very integrated into your business and carve them out so that they can stand separately and function without the help of corporate support services.

From the HR perspective, it is important to figure out how to do all the basic HR functions for an employee and answer questions such as how to pay them, provide benefits to them and give them assets they require to do their job. This is something you want to start ahead of time, but sometimes it is a guessing game when you are trying to decide how you are going to sell a portion of your business.

If it’s outta be sold to a strategic buyer, that buyer might already have capabilities to do what is necessary, maybe even have their own payroll, HR management systems or healthcare plans, in which case they would take your employees and add to theirs.

However, if you are selling to a private equity firm, they don’t have the same resources, which is why it is important to have these employe bases be standalone and be able to be self-sufficient. It’s simply one of those activities where there is a need to plan for the worst-case scenarios.

Challenges of Working With Unions or Represented Work Forces

There are challenges, but it’s not actually detrimental to the process, but it definitely is something that needs to be taken into consideration.

It is probably going to take some extra time, because there is another group that you are informing about the deal, and some countries, when they have a representative workforce, simply need to be consulted ahead of time. In other words, they get a say in how you are selling the company, which is why the process can take longer and require additional work.

The flip-side to this, however, is that because you are aware of what is expected, this is something that can be planned in advance and built in the timeline.

Divestiture Communication Plan

I think that, when talking about mergers and acquisitions, all communication plans are going to be key.

There is a lot of different players involved that keeping everybody in the know and communicated to takes a life of its own. In our case, we put together a communication team that doesn’t fall under HR even, as communication activity is much larger than HR itself.

There are employees who are targets, there are supervisors who are targets and there are also employees who are not initially part of the deal, but are involved with those who are, and these people also have questions to ask.

This means that there will be a communication plan for part of the organization that is not impacted by the deal as well.

There are also process partners, external companies and external bodies that need to be informed about the deal. One of the best practices we found in divestitures over the last few years is to start communicating with employees early on.

Sometimes deal requirements prevent that, like in cases when there are strict guidelines about when things can be communicated, but if given the opportunity, it is always wise to start communicating with employees as early as possible.

Q&A employee sessions can be very useful, as letting employees ask questions gives a chance for everybody to voice what their questions are.

We also keep a detailed FAQ blog so every question that comes in stays captured, gets answered and then gets fed back to employees. This relieves a lot of employees’ anxiety and costs next to nothing, compared to waiting and trying to put in retention programs and plans when they’ve already been going.

Key Materials HR Must Prepare For a Divestiture Diligence

The first step is to define the in-scope employee list. This is why ring fencing is so critical because you don’t want to start collecting data on the employee population and have that employee population change before you are done with the deal.

After identifying who is in scope, the focus shifts on what the buyer needs to know about this population, after which its time to start populating the data room.

When working with multiple buyers, you wouldn’t want tho share specific employee information early on in the process, but you would either do an aggregated census of employee details or deidentify it.

This can be done either by putting out basic information while relying on the buyer to ask you what they want to know, and the other, which is the way we practice is making a request list of important questions.

We try to populate a lot of the data in the data room in hopes that, when we start entertaining buyers we’ll already have a lot of important questions answered, which is far less stressful for the HR team, especially when dealing with employee populations in multiple countries. Divestitures are more work-intensive than an acquisition.

Collecting data from multiple countries for different populations can indeed take some time.

Purchasing Agreements

With one of the first global divestitures that we were working on, we went through the whole process of putting together the data room, we had management presentations with potential buyers and discussed what the buyer would do with employees.

One of the processes that we have in place within our company is that all the subject matter experts review the transaction agreements and the purchase agreements.

However, in this particular case, based on several meetings and when I was reading the transaction agreement, I realized it didn’t say that we are going to protect the employees, which I communicated back. I got an e-mail that required me to explain what expectations are, which caught me off guard because I am not competent to write in legal language.

Transition Service Agreements

Transition service agreements become necessary based on a short turnaround time in the deal, as well as in cases when the buyer isn’t capable of providing some services and there is a need to close the deal and not wait for the buyer to stand up payroll in a certain location.

They become problematic usually because a seller wants to close the deal and is not looking for a tail out, so many months on still dealing with employees. However, payroll is more common, just because it is not too difficult to provide.

Doing my first divestiture deal with the company from the UK, we had ten employees in the US, while the UK company had no capability in the US. They had no business in the US before, so they asked us for the TSA to manage these people for two months while they set themselves up, which I had agreed on only to discover later by the payroll person that is not possible.

Fortunately, everything fell in place, we were able to do it, but this experience was one of the reminders that divestitures aren’t exactly like acquisitions.

Transition Records

From a divestiture perspective, the amount of information that the buyer needs for employees is going to relate back to the type of deal you’ve agreed to.

• If its a stock deal, the buyer owns the company, so all the employees and employee records that are part of the company now belong to the buyer. This means that employee files or personnel records need to be prepared.
• On the flip side, if its an asset deal, the buyer is hiring those employees just as if they would hire somebody else off the street, so the seller doesn’t have the same obligation to provide that information. It wouldn’t even be appropriate.
  

Tips for M&A Practitioners Preparing for a Divestiture

My advice would be to budget two to three times more than what the corporate development team tells it’s going to take and prepare yourself for a lot of work. It is a lot of liaison with other groups, but it is definitely harder to turn the lens uppon yourself than it is to review another target’s data.  

There is a lot of inward-looking and a lot of time spent on gathering important information. We simply need to be the go-between from the business unit that is getting sold, the corporate SME’s that have information regarding that business, the legal team that is working through the due diligence process and the corporate development team that is working with the buyers on a potential transaction.

We are in the middle and need to be aware of all those constituents so that we can make sure the deal progresses.  

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