Everything You Need to Know About Rebadging in M&A

While rebadging is a term HR practitioners are quite familiar with, knowledge of rebadging has not caught on outside of the HR function.

We, at DealRoom work with dozens of companies helping them with M&A and today we will talk with rebadging expert Sachin Kumar to provide a thorough overview of the rebadging process.

What is rebadging?

Rebadging is the process of transferring people from one organization to the other. More specifically, companies enter contracts with vendors providing services to have the vendor hire employees the original company wishes to retain.

Quite literally, you are changing the “badge” an employee wears through this transfer of people between organizations.

It is important to note this rebadging happens outside of the M&A deal structure, though elements can be similar to the structure of an asset deal (more on this later).

What industries do rebadging?

While 10-15 years ago this answer would have been quite different, rebadging now cuts across all industries.

Why?

All industries have some sort of exposure to outsourcing (technology, processes, etc.), which has made rebadging more popular.

An additional point of consideration when examining who is rebadging is the size of the company. Most larger organizations have had some exposure to rebadging, therefore, size and willingness to rebadge are often precursors to this process.

Which functions are involved with the rebadging process?

When considering this question, you must begin by stepping back and understanding the deal construct - how does this rebadging process start?

Rebadging is generally associated with which side you are on, which determines the stakeholders involved. Moreover, the functions involved depend on which processes are being outsourced.

Generally, you have the business function and your enabling functions; here, HR moves from an enabling function to the core of the deal because employees are at the heart of the deal, and the rebadging involves employee information.

This is different from M&A where Corporate Development drives the deal. However, sometimes a rebadging deal can turn into an asset deal during the diligence process - ideally, corporate development would become more involved if this shift takes place.

The strategy behind rebadging

Beginning with outsourcing, the strategy is to improve margins or to improve processes; these are the things companies are looking for when they begin to outsource.

With this in mind, from the outsourcing company’s perspective the following should be considered:

(1) is the vendor capable of ramping up resources? and
(2) once the process is outsourced, what do I do with these employees?

After considering the above, rebadging becomes a good option for the company.

Some positives of rebadging for the original company include it does not have to lay people off and the employees already know how to do the work and understand the processes involved.

From the vendor’s strategic perspective, it gets trained people who know how to get things done with a client. Again, the ultimate drivers when it comes to rebadging include process improvement and margins.

Types of rebadging deals:

Client to partner
Partner to client
Rebadge partner to a new partner (note: this occurs once the contract ends - this can be very complicated)

What is the rebadging process?

Because rebadging is a very strategic decision, the following general process provides a general outline that will need to be tweaked for your unique situation in order to extract the best possible outcome:

Identify the level of overlap (Corporate Development could be involved here as well).
Identify the margins that must be improved via outsourcing/rebadging (here things are similar to a sale type of cycle).
Work with the enabling function to run the RFP process, which will generate competition and has the potential to move you toward an asset sale.
Answer key questions for the client (HR).
Move to due diligence; collect employee data; specifically, look at compensation, employee vacation, and severance; perform an in-depth side by side comparison.
Execute a sign offer letter.
Transfer employees.
Begin change management and onboarding for new employees. The requirements built into this step will vary greatly depending upon the country you are working with. For instance, in Europe the rebadged employees are granted protections so the partner cannot “squeeze” them or go on a firing spree; rather, the employees have rights ensuring they will not be adversely impacted

The dos and don’ts of rebadging:

DO:

Know what you are getting into - be careful with contracts.
Work to make it a “win” for both sides of the table.
Have an experienced M&A practitioner work to implement change management tools and strategies; these employees deserve this work, too.
If possible, examine employee performance reviews (this is often difficult to accomplish, but advantageous when possible).

DON’T:

Engage in arm twisting during the deal; since both sides will be working together for the time of the contract, you want to establish a strong relationship from the start of the rebadging process.
Acquire too many surprises - remember, if you as the vendor receive in the deal a department that is not functioning well, you still have to retain these employees.

Final thoughts

All business functions should learn about rebadging.

If you’re making a decision around doing something in-house or using consultants, you might want to first check in with HR - there may be individuals who can bring their experiences from rebadging to M&A.