Must see inside! During divestitures, sellers increasingly perform their own HR due diligence to put people assets in the best light and get the best price

HR Magazine, Sept, 2004 by Robert J. Grossman

When a corporation grows through an acquisition, it's usually not shy about letting the world know. News releases and press conferences announcing the new empire abound, portraying the company as a surefire success in a business environment where bigger is assumed to be better.

But for every acquirer, there's a divester--an organization that has chosen to sell off a unit, a division, a subsidiary or even the whole shebang.

In contrast to acquirers, even when divestitures make good business sense and pay off, divesters tend to avoid the limelight. Companies may view the process of unloading assets as embarrassing--a signal that senior management committed errors.

"Divestitures are the big secret," says Valerie Frederickson, CEO of Valerie Frederickson & Co., a global human capital management consulting firm in Menlo Park, Calif. "They're kept underground because the company doesn't want to be perceived as not doing well."

A similar dichotomy exists between the way acquirers and divesters involve their HR departments in the buying or selling process.

When companies seek out a target to buy, they usually pour substantial resources into HR-related due diligence, meticulously weighing the pros and cons of a purchase, often going outside for specialized consultants.

In contrast, divesters tend to be more reactive. On the selling side, "HR typically gets involved when the CEO comes in and says, 'Here's what we did yesterday,'" Frederickson observes. Instead, she argues, "they should be proactive, helping to put a gloss on what they're selling."

Ross Zimmerman, senior consultant at Hewitt Associates in Lincolnshire, Ill., a consulting firm that handles mergers, acquisitions and divestitures, says his organization works with HR on the buyer's side 95 percent of the time and on the seller's side only 5 percent of the time. But now, with a spate of failed negotiations and deals that critics see as missed opportunities to maximize profits, that ratio seems to be changing. Increasingly, sellers are recognizing the advantages of giving HR a more active role in the divesting process.

Zimmerman estimates that HR can add as much as 5 percent to the selling price by anticipating, accurately assessing and helping to strategically position human capital issues in each of the three phases of the divestiture process: pre-shopping, shopping and shoring-up.

At the very least, with HR in the loop, the divestiture will play out more easily, employees' needs will be spoken for, and the company can better control its reputation.

To Sell or Not To Sell

Once a company's leaders begin mulling the feasibility of divesting one or more pieces of the business, a flurry of activity usually ensues--with general counsel exploring the legal issues, the chief financial officer considering financial ramifications and the chief operating officer reviewing operational concerns.

In this pre-shopping phase, HR should be looking carefully at compensation, succession planning, and the continuity of exiting and remaining entities, says Tom Capizzi, vice president of worldwide HR at Santa Clara, Calif.-based Thales Navigation, a manufacturer and distributor of global satellite positioning, navigation and guidance equipment throughout the United States and Europe. Capizzi has been through six divestitures at Thales, each affecting between 20 and 1,000 employees.

When the executive committee at Thales determines divestiture is a possible option, Capizzi and his HR team move rapidly. "We conduct a reverse due diligence-an evaluation of our entire situation from a human capital perspective--and identify issues and concerns so there will be no surprises. We need to know what we're giving up, what we're willing to offer it for and what the impact will be on our remaining business. CEOs appreciate that because it allows them to make informed decisions."

Pre-shopping is the optimum time for HR to produce a clear-eyed assessment of skills and competencies of key talent at the unit being divested. "Show how you will keep your key home talent while passing along enough to keep the divested piece attractive," says Margie Mader-Clark, vice president of HR and facilities at Sunnyvale, Calif.-based Hyperion Solutions Corp., a producer of business performance management software with 2,600 employees in 20 countries. "You're doing [employee] rankings, keeping in mind that you don't want to sell off your brainpower," adds Mader-Clark, who has handled five divestitures during her career.

Comprehensive due diligence also includes a detailed examination of base salaries, benefits costs and soft costs to determine the financial liability of the unit. Also included is an assessment of what will happen to your infrastructure if you eliminate part of it, and a plan for keeping the group that's targeted for divesting running until the final sale.

For example, when Mitsubishi Corp. recently decided to divest a U.S. chemical company it considered to be underperforming, it involved the company president and top HR executive, Dave Siporin, in the decision-making process.