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

Since leaders who are disgruntled can hurt the sale, offer them bonuses for helping get the best price, Bowers says. In addition, companies shore up their management by folding into their compensation packages change-of-control agreements, or parachutes, that protect executives who are linked to the divestiture--usually at rates equivalent to annual salary for those at the top. Parachutes are effective if done in moderation because they help preserve and enhance the property. But when they make the costs of the acquisition too great, they're aptly called poison pills.

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Include assurances for the buyer that key people will stick around during and after the transition. In the Mitsubishi divestiture, HR created three cohorts of employees, all with different termination dates. The first cohort was cut when the deal was announced; the second was offered incentives to stay on until the deal closed; and a few employees were offered positions with the buyer.

Remember too that employees who remain often have a huge investment in the part of the organization that's going away. That puts them at a retention risk. "The company has to reach out to them," says Mader-Clark. "You have to make your people understand the business reasons for the move, and that they're not next in line."

Deal Breakers

Overall, whether HR-related or not, many promising deals crater. Zimmerman estimates that 40 percent of the time, the original deal will fail to close, but that on the second or third effort, the seller will succeed in finding a suitable buyer. Twenty percent will continue to twist in the wind, leaving the seller no choice but to withdraw the deal.

Experts recommend factoring this worst-case scenario into your planning. Consider how you will restore morale and maintain productivity if workers and managers who thought they were being adopted find themselves back home. "Say you're a restaurant chain trying to unload some unprofitable locations, and the deal falls through," says Schneider. "Are you better off with the doors shuttered, or continuing to run it until you can find another buyer down the road?"

Generally, HR miscalculations and omissions cripple but don't torpedo the transaction.

"We've worked on hundreds of deals, and HR side effects and revelations frequently influence the ultimate purchase price. But only in about 5 percent of the cases will they scotch the deal," says Tony Dasilva, partner and northeast leader at KPMG's Compensation and Benefits, People Services Practice, in Boston. "Often the discoveries--golden parachutes, severance commitments or option payouts--will give the buyer ammunition for negotiating a lower price."

Cultural fit, however, is an exception. "Rarely does culture influence the price, but it is the deal killer," Zimmerman says. "It's usually an on/off switch. The buyer sees something so different that would require so much work to integrate that it backs away."

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The acquirer who minimizes the impact of culture may quickly find itself holding a fire sale, as Felsher discovered. Her company, steeped in a hard-driving, all-consuming Silicon Valley work ethic in a "carve out" divestiture, acquired a more laid-back Quebec-based workforce. "From the get-go, problems surfaced. Three months later, we began the divestiture."