One of the top challenges of international transactions is that companies don’t often document their difficulties openly. Leaders want to appear collected and in control. Data privacy and fear of breaching contracts also holds many people back from publicizing their struggles, especially during transactions. Of course, it is logical that leaders would be protective of information that may disrupt the day to day of their most critical element: their people.
The reality of any international transaction is that cultural differences, regulatory changes, and unexpected renegotiations catch companies off guard. The fact that hurdles are rarely documented makes it hard to learn from others’ mistakes. So, I’ve decided to inject some transparency into the subject of managing separating companies, especially when the deal crosses borders. This article is based on my experience working with HR merger and acquisition (M&A) managers, investors, and firms in the private equity industry over the past decade who have divested and carved out assets for long-term gain.
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Challenges of divestitures
Here are a few of the top challenges that can get in the way of a smooth divestiture:
- Parting ways of highly integrated businesses
Both on the technology front and HR front, companies can struggle to separate truly integrated businesses. Technology-wise, Enterprise Resource Planning systems have enabled integration, while HR-wise, people inevitably work closely with different teams and divisions as part of their usual responsibilities.These closely-knit systems and teams can make business areas difficult and costly to decouple. This can lead to the divested entity relying on the parent company transaction-close. When multiple people manage different product lines, and no single executive can serve as the voice of the overall business, companies face even more difficulty initiating a clean break.
- Indefinite transitional services provision
Fast timelines for divestitures can mean that the parent company must provide transitional services to the divested unit for a period of time after deal-close. This might be negotiated as an act of good faith, or forced upon the parent company.Transition Service Agreements (TSAs) are not always quicker or cheaper than contracting a service externally, they may act as a stop gap but, if this happens with an indefinite timeline, more problem for cross-border deals will likely emerge. If neither the seller nor the buyer is in the service-providing business, or cannot ensure cost efficiencies in different jurisdictions, costs will likely rise.
- Contrasting agendas and strategies
Soon after divestiture discussions begin, different parties may reveal their agendas. Or, they might play their hand close to their chest. Conflict can manifest as both the seller and divested unit work to position themselves in the most favorable light, according to Deloitte.One might never know the other’s true intentions or interests and, if only one party is being transparent, inequalities arise during negotiations. This is particularly likely when multiple nationalities are involved in a divestiture. Beyond the cultural differences we all know exist, there is an innate distrust of the unknown, which can sadly lead to even more misunderstandings based on assumptions about an unfamiliar culture.
- Organizational disruption
Just as is true of any M&A deal, divestitures can be disruptive internally. Employees have to continue their day to day, while either managing, side-stepping, or simply trying not to be impacted by separation activities.The disruption during any deal stretches resources and causes worry among employees sensing instability. PwC states that “it is imperative for sellers to be aware of employee related issues and be proactive about organizational and communication planning early in the divestiture process.”
Why do transaction experts emphasize proactive treatment of employee-related issues?
Because people are the most critical element in any divestiture.
If you have any experience in transactions, you’ll have noticed how people can be both a barrier to and a victim of divestitures.
If corporations were run by robots, all types of M&A deals might be smoother. However, the people in those companies are often synonymous with the value of the unit being divested.
While “smooth” transactions might be a pipe dream, in my experience, the most successful HR M&A leaders and executives were those who prepared for human error, self-interest, and upset ahead of transactions in order to complete the deal successfully. Keeping the people element in mind during divestitures, and importantly, in divested companies, protects against value leaks.
What happens when divestitures cross borders?
Multijurisdictional deals are always more complex, due to employment laws differing by country and sometimes even cities. HR teams may take on tasks such as establishing legal entities and employee registrations, labor consultations, and employee transfers, all the while adhering to data privacy requirements. So, what do seasoned HR M&A professionals do to prepare, and to look after their people?
They build a global employment platform into the deal plan.
A global employment platform acts as a lever in the deal-negotiation process to help both parties eliminate the dependence on TSAs and to present cost savings to leadership.
If HR M&A professionals propose a compliant, global employment platform from the outset, they can ensure their critical asset – their people – will be taken care of regardless of what decisions are made by leadership down the line.
How does a global employment platform help HR M&A professionals?
- This solution exists for you to achieve cost-efficiency and effectiveness when managing employee transfers.
- Your superiors can get the deal done with the least amount of HR admin or employment law hiccups.
- You can influence the integration process positively, keep track of all your valued employees, and ensure the best-case scenario for each person.
- This solution will strengthen your position in front of your leadership, as a proactive problem solver for issues that can completely derail companies’ post-transaction.
How is it beneficial in the eyes of the seller to have an employment platform in place for all international employees?
This is a highly time-sensitive issue and works both ways: The divested entity wants employees to be happy and contracted with compliant infrastructure, wherever they lack a presence, but the seller also wants to minimize the impact on remaining team members who may have worked closely with the divested unit. The positive impact of having a platform designed to simplify international HR, and provide transparency to transferring teams, means a smooth transfer for both sides.
It is important to note that all transactions create uncertainty. This can be distracting from everyday business. Having little control over a business decision — as is true for most employees — can lead companies to focus on the upset rather than the benefits of the divestiture. The top advantage of building an employment platform, like Globalization Partners, into your deal plan, is that HR M&A managers, remaining teams, and transferring employees will all be able to continue to focus on growing your company, throughout your international divestiture.
Just like your people, a global employment platform is a critical element in any transaction.