“The first thing we talk about is understanding the very specific products or assets being sold, and then we identify the people around that.”
HR’s involvement during a divestiture
On this episode, Kison speaks with Sallie Cunningham about how to plan a divestiture from HR’s perspective. Together they discuss the process of moving employees, how to approach ringfencing, and what Transition Service Agreements (TSAs) are.
Sallie also explains what the key materials HR must have when it comes to preparing for due diligence during a divestiture and which transition records are required for HR to gather.
At the time we recorded this podcast, Sallie was the HR Executive and M&A leader for GE Corporate, where she was leading the HR workstreams for the sale of GE Healthcare's Biopharma business to Danaher, which closed on March 31, 2020.
The business, now called Cytiva, is a standalone operating company within Danaher's Life Sciences segment. Sallie transitioned to Cytiva at close and is now the HR integration leader for the business.
“If you think about what the business needs for Day 1, they have to be able to accept a purchase order, invoice a customer, ship a product, and of course pay the employees. There are a lot of things that can be figured out after close, but payroll is not one of them.”
Text version of interview
Maybe we can kick off with a brief introduction of yourself?
I am an HR deal lead at GE. I have been in the company for 14 years and spent half of my GE career working full time in HR M&A. I have worked across the healthcare business, GE Digital, GE Corporate, and I am back to health care now today.
So Sally, can you briefly discuss the larger role HR plays when conducting a divestiture?
I think HR has really positioned itself to have a bigger influence. It’s interesting to see how much the deal teams really rely on the HR team to bring a number of matters forward related to the culture and the integration of the business, as well as a transactional piece, which would be related to the payroll and the benefits.
How do you start the process of moving employees?
When meeting with an HR leader in one of our businesses that are getting ready to prepare for a transaction, we first need to understand the very specific products or assets that are being sold, and then we identify the people around those assets and start aligning people around them.
Once we know that information, then we can identify our core population, and that would include things like product development or commercial supply chain. Then from that, we dip into the support or the enabling functions, like finance HR or IT.
Could you give a brief definition of a COE?
What we find in a lot of larger organizations like ours, is that we’ll achieve scale by creating centers of excellence around HR, finance or any functions where it makes much more sense economically to share resources rather than have them fully dedicated to a specific business segment. This saves a lot on a headcount and creating scale for those functions.
How does the legal entity structure make an impact in all this?
Once we know the assets that are being sold, we should also have an understanding of the legal entity structure that’s going across to the buyer. That can make a difference in regard to knowing if the employment-related liabilities, such as pension plans, will go across to the buyer.
In an asset transaction, it’s just the employees and other specifically defined assets and not the related liabilities. But, in a large integrated company, the benefits platforms are often shared across multiple legal entities, so even if a specific legal entity is being sold, the benefit plan would not necessarily go across with it.
How does it work on the other side in case the buyers aren’t ready to set a payroll or benefits?
A number of countries or locales will allow for the seller to continue to provide payer and benefits services under the Transition Services Agreement, or TSA. It really just allows the buyer some breathing room to set up payrolls and benefit platforms where they don’t currently exist. In that case, the payroll and benefits continue to be provided as a service to the buyer through the seller, usually no longer than 12 months post-close.
The other option, which some countries will allow is leasing agreements. This is different from the TSA because the legal entity the employees reside in hasn’t transferred to the buyer at close. These are done only as a temporary bridge while the buyer is establishing their entity with payroll and a benefits plan.
When it comes to these larger multi-national deals, you probably have to have multiple teams that are specifically focused on localized laws. How does that work?
We have a highly experience steam that has seen a lot of different types of deals. However, no deal is alike and we rely heavily on our M&A people operations team to guide us through every nuance and understand what’s available to us at the local level. We have folks that are typically assigned to a region and they are experts in that region.
Transition Service Agreements are sometimes required during a divestiture. Can you briefly explain what these agreements are, what goes into them, and in what situations are they required?
From an HR standpoint, the most common one I see is what we use for payroll and benefits continuation post-close where we need it. Also, another common one is when a buyer has a lot of infrastructure to set up in order to operate the business that they are about to acquire.
How do you keep employees from freaking out when divesting a business?
Having a credible leadership team in place in the business segment that’s being sold, who can articulate good reasons for doing the deal will help drive the engagement. When the employees see the leadership team excited about the future they will be more inclined to follow.
Including the buyer in the announcement of the milestones pre-close is helpful and should be done whenever possible. It’s also important to have a good communication strategy to put employee’s minds at ease that includes the basic outbound terms and conditions that will be for the treatment of their benefits.
What are outbound terms and conditions?
This is when the buyer commits to salary and benefits comparability in the aggregate for a period of time post-close. This is basic protection so that the buyer doesn’t acquire a business and immediately slash salaries, increase out-of-pocket costs for benefits or reduce the workforce without layoff benefits.
Is that something that’s transparent with the people when they move companies?
It depends on the deal. By the time the buyer is getting to the point of talking to employees about the new benefit plan, they are able to send them a message that their benefit plan is comparable and comprehensive, similarly to the one they are used to. It might not be an exact match, but it is comparable in the aggregate. Typically, they are quite good at reassuring employees early on.
What is ring-fencing?
Once you understand what is being sold, you need to identify the people who are part of those legal entities or those assets. You will have a core group of people who are 100 percent dedicated to the business, which is usually fairly straightforward to identify.
You then divide people who are in shared services roles into groups, and there will be people who are generally showing more than 50 percent dedication to the business being sold and these are the people that most often would go with the deal and you start identifying them early on. It’s important to let people know that they are part of the business and that they are not going to be eligible to apply for roles outside of that ring-fence that are within your company.
What value do professional employer organizations or PEO’s provide in M&A?
They can provide tremendous value. When it comes to payroll, the TSA’s and leasing agreements are options, but they are short-term options. Additionally, they are not available everywhere, and sometimes the buyer can’t set up the payroll and benefit for the employees with their internal resources.
In these cases, PEO’s can be a really good solution. PEO’s are big organizations with great negotiating power and offer a wider range of options companies can choose from. As a buyer, you can offer your employees very comprehensive benefit plans at competitive rates.
Going back to the selling process, now that you are divesting the company and you have to entertain buyers, how do you accommodate them?
We partner really closely with our buyers who need a little help in understanding how to run a payroll project plan, how to set up pay code and deal with nuances that come up along the way. It’s all done on very personal level and that goes back to the people operations team. This kind of help is especially important for buyers who aren’t serial acquirers and don’t have the in-house expertise.
All buyers can’t be wonderful. What do painful buyers look like?
The painful buyers are those that take advantage of our effort to accommodate them or those that are not listening and are dragging their feet in terms of project plans, payrolls, and things like that. This makes the process take much longer than it should and they can’t close the deal if they cant payroll their employees. Sometimes the buyers just won’t put the investment into the HR function that they probably should.
What happens on day one, Sally?
By the time we get to day one the HR function has been really tightly engaged between the buyer and the seller preparing for the payrolls, benefit plans, et cetera. Buyers should know what their basic policies are going to be, they should already have some key retention agreements in place and everything should be ready to go live that will enable the business to transact.
You get to lunch the communications plan that the buyer does that provides the detail around the deal value drivers and they are going to become much more open with the integration plan. It’s time for them to really engage with their new business on how they are going to achieve those value drivers.
What does the carve-out process consist of from an HR perspective?
This is when the HR team really starts to see the interdependencies they have with other functions. I work closely with our deal team, tax, legal, FP&A, IT, communications, and I also talk to people in sourcing, facilities, environmental health, and safety. We are closely aligned on those assets or entities that are being transferred and the employees that are aligned with those assets. We are trying to be good advocates, help employees and leadership team navigate all the uncertainty.
What’s the typical timeframe you see for the carve-out process?
It depends on the size and complexity of the business. It may depend on how stretched your deal team is, but if you are able to pull together a team of experienced people who really understand the business, you can pull a deal together in a matter of weeks. Sometimes it can take months, and sometimes you can get to the point of letter of intent or even signing, but still have quite a bit of work to do on the carve-out, so it can be an ongoing process.
HR plays an important role in building communications plans during M&A deals. What goes into a communications plan when it comes to a divestiture?
It’s endless. We are lucky to have a really sophisticated communications function and they have a framework that starts from the day the deal goes public and all the way through the integration. It includes the why’s of the transaction, what we are doing, why we are doing it, press releases, and other information that’s being shared. They collaborate closely with our business leaders on how to effectively push important information to employees and they also develop our extensive Q&A documents.
What are the key materials HR must prepare when it comes to diligence during divestiture?
The first thing would be pulling together that employee census. Early in the process when we are preparing to launch due diligence we will share aggregated information and provide average salaries by function, location or pay brand or grade, a number of encumbrances in each job type, and things like that. We don’t provide individual-level information and we use a VDR with access restrictions to maximize privacy.
With the aggregated census information we also put together a basic org chart, with names removed. I also prioritize pulling together information such as salaries, bonuses, benefits, special severance provisions, pending litigation, and similar financial information, as the buyer is going to want to know what the costs are going to be. Then we will move on to things like employee handbooks, policy manuals, copies of employment offers, or contract templates.
What type of transition records or data are required for HR to gather?
When the deal closes, especially if it’s a stock transaction we will send across to the buyer things like records related to payroll, service credit calculations, documents that the employee has signed over the years, salary and bonus history, performance reviews, training records and similar.
What’s your involvement when it comes to the purchase agreement?
A couple of things. We would include things like reps and warranties around compliance with benefit or pension plans that might be going across to the buyer pending litigation if there is any. There is a specific employee matters agreement included that HR items can often be found throughout the purchase agreement, not just limited to what’s in the employee matters section.
When the first draft comes through from the legal team, if I am on the seller side I have a pretty good idea of what that content is going to be for the HR section but if the draft is made by the buyer, it needs a bit more attention. We also have our Labor and Employment Council that sits within the business and Employment Council that’s part of the external law first, so there are usually three or four of us that review documents together.
When it comes to divestitures, what is your biggest headache challenge in the whole process?
There is a lot of very detailed work and a lot of work that just requires time to think, and it happens that you just don’t have that time you need. This is why it is important to have the right team of people that can work intensively on a transaction, both internally and externally. It’s on me to get a lot of work done by others and motivate people to action.
What is the craziest thing you’ve seen in M&A?
There was one deal we were very excited about. We had everything ready, we had the big communications plan and we were all set to go. We had a plan to make a big announcement on Monday and on Friday afternoon prior the deal was canceled. It was really devastating. It’s rare to get that far just to have everyone walk away.
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