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Limiting the hidden risks in divestitures

Mergers and Acquisitions
Mergers and Acquisitions

By Kelly Karger | December 2, 2019

As divestitures grow more common, more sellers are recognizing the importance of addressing people issues to help retain shareholder value.

Many companies are looking at divestment as a way to become more streamlined — as opposed to simply selling underperforming assets — and as this activity grows, there’s a need to treat divesting as a strategic business process rather than a one-time activity. The reality is that corporations will likely divest many assets in the long run, and as such there are many pitfalls in not giving this process its due care.

Our research has found that over 5,500 divestments, each worth over $50 million in value, were completed worldwide from 2010 to 2018, with a combined value of $3.9 trillion. Over half of the companies that engaged in divestments between 2010 and 2018 lost shareholder value, according to new Willis Towers Watson research conducted in partnership with Cass Business School.

Many of the better performing divestments were spin-offs — which involve significant pre-deal planning and preparation to better demonstrate its value separately from the parent. In our view, this supports the value of pre-deal preparation and the importance of business leaders engaging, both internally and externally, on the rationale for the deal to clearly demonstrate the value of a division being sold and the prospects for the remaining business.

More experienced sellers are now looking to define principles for people issues and people-related programs before engaging with potential buyers. When divestments are such a fast-paced process, where multiple activities and issues must be juggled almost simultaneously, it raises questions:

  • Why invest in businesses you are exiting?
  • What do sellers have to gain by working so hard to define treatment of employees and people-related programs?

Hidden risks

The most significant risk that sellers assume is one beyond their control — namely, the actions of the buyer. These actions, both positive and negative, can be reflected back on you as the seller. When the actions are negative, we refer to this as “reputational blowback.”

Naturally, some buyers will have significant cultural issues to be wary of. For instance:

  • Private equity buyers may seek to drastically cut costs post-close, often adversely impacting employees.
  • Inexperienced or non-global buyers often don’t have the infrastructure that can scale and cross borders quickly.
  • Foreign buyers can come with challenges that have more to do with national culture, than with the buyer itself.

People risks stemming from these cultural issues can quickly hurt the value of the business once the deal has been announced and people begin forming their own opinions of the deal, or if the deal doesn’t progress according to the expected timeline.

Employee perception

“Selling well” isn’t just about getting the best price and terms. It also includes ensuring that the deal considers the best interests of all stakeholders, including the employee population. Perception of the affected employees is two-fold.

  • First, they will look to understand who the buyer is and what to expect after the deal closes.
  • Second, they will look to how they are treated by the seller as the close approaches.

We can’t forget about the employees of the remaining business (RemainCo), either. The RemainCo employees will be watching and considering: Is my business next? Is that what I can expect?

The bottom line: All employees remain your employees…until they aren’t. And negative repercussions can quickly multiply if employees feel abandoned or discarded during the process.

Getting ahead of the risk

Getting ahead of this risk (quite literally) requires prep work before a deal. This prep work is not just about getting the house in order from a business standpoint, but also preparing for the people issues.

While putting together information that will need to be made available in the virtual data room, sellers should be identifying their preferred negotiating positions on people issues as well as what they are willing to agree to in order to get the deal done. This principles-based preparation is best done before getting into discussions with potential buyers. Common topics of preparation include the following principles that apply to employee protection such as:

  • Requirement to make job offers
  • Compensation and benefits treatment
  • Retention of critical talent
  • Severance terms

Don’t forget to also identify whether you are willing to establish any transition service agreements (TSAs) for HR services and programs, and under what terms. TSAs can be useful in helping to finalize the transaction terms as well as cushioning the impact on employees.

Once potential buyers have been engaged, reverse due diligence (that is, finding out who you are selling to) can be critical — to ensure that a selected buyer not only has the best offer for the transaction but also is the best suited buyer for the future of the business, and acts in the best interest of shareholders. In order to require accountability of the buyer via the terms of the purchase agreement and employee matters agreement, you’ll need to know your buyer and what they are capable of accomplishing.

When a buyer has been selected and you are free to communicate, consider how you invest in both divested employees and RemainCo employees:

  • Portal for information to divested employees leading up to close
  • Portal with communications and FAQs for leaders to help them answer employee concerns
  • Training for leaders on managing through change, specifically in transactions
  • Formal exit processes to end the relationship and provide a warm good-bye

Business case for ‘selling well’

The buyer’s aim is often to change the acquired business and create something different including integrating with existing businesses. While these changes can’t be controlled by the seller, in many cases they will impact its reputation. In the absence of information, people will fill that void with their own narrative and many times the water cooler talk will be negative.

If divested employees and RemainCo employees don’t understand your role in the divestiture process they can (rightly or wrongly) attribute the buyer’s actions to you as the seller. Being an active, thoughtful and advocating seller goes a long way to avoiding this reputational blowback.


Senior Director, Global M&A

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