M&A Leverage

Spin-Offs – A Game of Gain: Successful Integration of a Global Battery Giant

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A first-hand account of how Aon’s recommendations helped a spin-off entity to set up a standalone company without business disruption in 35 countries.

Context
2015 saw the global business landscape being reshaped through a high volume of M&A activity. The combined values of the deals reached the highest amount ever, surpassing the previous record set in 2007. Some of the largest deals that were announced were AB InBev and SABMiller, Shell and BG Group, Charter and Time Warner Cable. So far, 2016 appears to be promising.

With companies adopting different strategies and rationales for M&A activity, we see that the sale of noncore assets seems to be the trend globally. Companies are working towards growing their core assets. According to a Deloitte survey on the mergers and acquisitions trends in 2016, 52% of corporate respondents said that their company plans to pursue divestitures to shed non-core assets in the year ahead in order to help focus on their core business. And we believe that these spin-off s will change the game for the coming years as they move from being a tail brand to a core business product.

Aon Strategic Advisory has supported many such spin-off integrations in the past through various transaction stages, both in the area of risk advisory and human capital management. We also recently had the privilege of working on one of the key transactions in the FMCG spin-off space.

Client situation/background
The client in question is a large FMCG business, and throughout 2015 and part of 2016, Aon supported them while they spun-off one of their non-core lines of business. The spin-off entity had large operations, with about 2,700 employees in scope in 35 countries covering North America, Latin America, Europe and Asia. The acquiring entity’s strategy was to set up the spin-off entity as a standalone company, to focus only on the brand acquired and not merge it internally with their own product basket.

Client challenges/issues
The spin-off entity in the past followed the FMCG conglomerates’ HR system, processes and policies. We believed this would be the biggest challenge to address, as going forward it would be a standalone entity that might not enjoy the bargaining power that the conglomerate had. Another main challenge would be the spread of the countries, with many thinly populated geographies. As many of the countries had manpower ranging from 1–10, setting up individual HR benefits programs needed to be considered from a cost management lens.

With the spin-off being announced and Day 1 being a year later, the employees who were to transition to the new entity had the choice either to accept or to reject the offer made by the acquirer, which added ambiguity to the HR benefits policy set up.

The client’s needs and expectations from the project was to maintain a comparable compensation and benefit offering to the employees who would transition to the new entity, to ensure local implementation as per legal/taxes framework in line with the country and to validate the recommendation from a market prevalence perspective, so as to remain competitive in its offering.

With all the guidelines given to Aon by the client, the key considerations taken into account while decision-making are shared below.

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There were also various sources of complexity impacting the timing, including the set-up of the legal entity, tax ID, bank outs, etc., vendor negotiations and replication capabilities, administration lead time, feasibility for smaller groups, works councils negotiations, trustee negotiations, government filings/approvals and communication of the change.

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Aon’s approach To achieve the aforementioned deal goals, Aon employed its well-researched model on HR integration in spin-off transactions. We considered various aspects before suggesting a way forward strategy, such as:

  • Articulating a Total Rewards approach addressing market positioning and internal equity, cost neutrality, preferred platform and grandfathering aligned with the above commitment
  • Giving guidance on C&B platforms by country approach
  • Articulating cost objectives (cost neutrality, cost reduction, etc.)
  • Conducting multi-day project plan workshops with the C&B leads
  • Creating a C&B work charter and outlining time frame for separation as feasible
  • Discussing an overall talent retention engagement approach
  • Outlining the Day 1 approach for Total Rewards
  • Outlining the approach for the transition period
  • Assessing the employment transfer implications and consultation requirements by country
  • Confirming the list of standalone global compensation and benefits programs and those sponsored by parent company

We also ensured that a strong governance system was set up. As the separation process involves a range of considerations and perspectives and requires clear, effective decision-making, governance around a spin separation is particularly important. While the parent’s shareholders have a vested interest in the success of both the parent and spin-off company, the management of the two companies will have their own perspectives on the go forward plan in the spin separation. Though important to consider the balance of perspectives in reaching decisions, ultimate decision-making authority resides with the acquiring organization, guided by the spin-off agreement.

We began by conducting detailed interviews with the leadership teams of both organizations in a bid to understand the organizational background and context, strategies, current compensation and benefits structure, and workforce demographics. A key focus area during these interviews was to understand the differences from an ‘as is’ stake that would be necessary to set up a standalone benefits program for various countries. Aon also conducted a thorough review of data and documents that were received from the client highlighting the current benefits offerings.

After the analysis, various regional teams conducted meetings with the in-country HR teams to further understand the benefits offering and the criticality of resources and any deviations that were present. Based on the analysis of the inputs, we created a go forward plan for each of the 35 geographies.

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The table below highlights the value and impact created for the client with Aon’s approach mentioned above:

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Client Impact
The transition of 2,700 employees in 35 countries was completed on Day 1 with no disruptions. Comparable benefits were set up for countries with less than 10 employees by leveraging global policies of the acquiring group, and for countries with smaller populations, we leveraged our insurance broking arm to provide market competitive benefit plans and ensured employee communications by conducting various workshops to explain the new plans.
 

Written by:
Faiza Khan

Consultant
Aon Strategic Advisory
faiza.khan@aonhewitt.com

 

 

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