It wasn’t until recently that people priorities became a fully realised area of interest in M&A (mergers and acquisitions) transactions.
This new focus on human capital seeks to understand the variety of people risks during M&A and, consequently, diversify the value that can be compromised during a transitional moment for a business. One such example was the annual roundup of People Risks in M&A Transactions, which warns how people-related challenges might become trivialised in a competitive deal-environment.
In short, people matter in driving an M&A deal to reach its potential. People priorities are critical to the successful delivery of an M&A because change is a variable that all businesses must eventually navigate.
Value can be damaged, if not destroyed, when a company fails to align people priorities with the same focus and attention as other goals and can result in unplanned, additional resource requirements; costly ongoing transition service agreements; and attrition of key talent from the business. There are many scenarios when your talent is underprioritized, including a failure for managers to anticipate cultural and organisational compatibility, or when employee communications are unclear.
What is a Divestiture?
A divestiture represents either the partial or full sale of a business subsidiary through sale, exchange, or bankruptcy. Businesses may face challenges impacting their cash flow, debts, or profit margins. In order to overcome these setbacks, a business may need to sell its assets to improve the business’ financial position. A divestiture is more commonly a management decision that occurs when an area of a business is underperforming or falls outside of its core competencies.
As businesses experience growth, they often decide to refocus and streamline; one potential streamlining mechanism is to close less profitable business areas or assets. For example, conglomerates that scale and cross into unrelated business areas are at risk of costly inefficiency. A divested business, therefore, may be spun off into an independent company.
As a result, a divestiture might occur in response to an M&A deal, a management decision, or from financial pressure. A company might even divest assets as part of a strategy. Other scenarios resulting in divestiture might are highlighted below:
- Redundancy risks: roles within an area of a business may become redundant after the completion of an M&A transaction. This may be due to the affected business area not aligning with the new strategy and is, therefore, divested to free cash and focus.
- M&A attraction value: the divestiture of part of a business might help improve a business’ sale value or attraction to a potential buyer.
- Financial distress, or bankruptcy: when a business is poorly performing, it might sell off assets, especially if faced with potential bankruptcy or administration.
- Failing assets: like those firms under financial stress, a decision to divest assets might occur when a product or service is underperforming. The disposal of these assets would, in theory, free attention to focus on areas of strength and opportunity.
- Closing locations: for certain industries, especially where storefronts are used to reach customers, reducing locations might help manage underperforming assets. This is usually more common in retail, food services, travel and even retail banking.
- Other reasons: For example, a court of law, or other authoritative body may require the sale of a business for fairer market competition.
Stages of the Divestiture Process (in Steps)
1. What strategic value does it offer?
Assessing the availability of deals, and the impacts of each on the value of a business, is critical. This is a starting point for divestitures, especially if you can anticipate stakeholder interests and align a strategy that credibly adds value for a seller.
But, in terms of human capital, it’s imperative to plan for what’s called “in-scope employees”, or those transferring over to the new business. This includes identifying financial information linked to people costs such as aligning rewards and potential liabilities, that might impact your operation.
2. Due Diligence: Involve HR to deliver a Project Plan or ”Playbook”
Identifying the organisational people structure; any shared employees that may be employed by a separate employing entity but provide services to the ‘to-be’ divested business; and accounting for any potential factors that may detrimentally impact the value of a deal or the decision for the buyer to proceed with the purchase, is key and time well spent.
HR involvement covers a wide scope, from overall deal governance to managing risks. Part of this phase should include a review of any potential liabilities, and plans to proactively communicate organisational changes with employees and establish expectations. A ‘playbook’ will cover key HR goals that will help stabilise the divestiture process until it concludes.
3. Challenges in Delivery
Executing a divestiture is no small feat. Both sellers and buyers alike will align behind a common goal to improve the value of an operation. During this phase, there may be barriers to overcome. This includes the likes of ongoing compliance for employment laws, transfer of employees (and benefits), and even issues with expat assignments (such as visas).
4. Deal closure
Once the transaction completes, the process doesn’t finish. Rather, HR professionals will help to motivate further success for the new business particularly in the areas of employee productivity and engagement, and company culture.
Ultimately, by divesting assets a company can free time and money resources to shrink costs, repay debts, refocus business priorities, or even reinvest.
In challenging times, especially when disruptions are afoot, divestitures may become more common. The rising influence of start-ups, for example, creates more market competition for other firms and, when challenged by the likes of market volatility, businesses need to refocus and reprioritise.
The People Side of Divestitures
Employees are one of the largest operating expenses of a company. Yet, during a divestiture, employees from all businesses involved in a deal can be impacted. The effect on employees, noticed in a report by PWC, makes “the people side of a divestiture one of the import factors to consider”.
Even though divestitures are mission critical in influencing a business’ profitability, if employee motivation and retention is troubled, then a deal can quickly underperform. Divestitures are not ‘acquisitions in reverse’. M&A’s can seem celebratory as new companies merge to form a more successful brand; yet divestitures are often more emotionally challenging because it affects a company’s employees.
Challenges with talent retention (including senior leaders) can be common. Dissatisfaction, lacking engagement, and better offers from competitors can dissuade talent and undermine the expectations of a new company after a deal closes.
If not properly executed, divestitures can turn from valuable to risky. Different priorities will compete for attention and people-related concerns should be given focus. It’s an oversight to assume that employees will fit into a new business without a proper strategy.
So, what people priorities should matter to you?
- Employee retention, productivity and engagement should fall under your priorities.
- Managing people prioritise means nurturing staff from the earliest part of a deal and long after it completes.
- When ignored, people priorities can damage or destroy value for a business.
How IRIS HR Consulting Can Help
HR plays a vital role in delivering and executing a divestiture, especially during a merger and acquisition. If you need help managing your people priorities, IRIS HR Consulting are global HR specialists with the right expertise to understand how motivated and productive employees can drive value. Get in touch today.