Amsterdam may13 v3_picconi

1

MANAGING COMPLEX GLOBAL CARVE-OUTSA CASE STUDY AND LESSONS LEARNED FROM AN HR AND

ORGANISATIONAL PERSPECTIVE

5° Merger Integration Management Forum

Amsterdam, Sheraton Schipol May 14th, 2013

Francesco Picconi

Introducing Francesco Picconi

Group Head of HR at Falck, Italy

HR Director, South Europe & Africa, Areva T&D, Italy

HR Director, BU Corus Colors, Corus Group, UK

Group OD Director, Indesit Company, Italy

HR Director BU, Transolver/Fraikin, Fiat Iveco, France

OD Manager, Automotive Lighting, Fiat Magneti Marelli, Germany

HR Manager Global Marketing and Sales, GE Oil&Gas, Italy

BUT MOST IMPORTANTLY……

A Multicultural HR passionate for M&A, JV, Post-Mergers Integration

in International/ Global contexts

it.linkedin.com/in/francescopicconi/

2 Phone +39 335 5351875

http://it.linkedin.com/in/francescopicconi/




3

What is a carve-out

A carve-out is the process through which a Company divests subsidiaries, divisions, B.U.’s, assets to:

- another company

- a combination of companies

- individuals

in exchange for cash, securities or assets as consideration

4

The buyer can be:

- - another Company (acquisition)

- - a combination of Companies in view of a joint management or a subsequent carve-out: the Areva T&D case

- - Its own shareholders (spin-off)

- - the public stock market (IPO)

- - the subsidiary’s management (Management Buy Out)

What is a carve-out

5

Carve-out and Acquisition

Company A w/o subsidiary B

Old Sub B

Company C

Cash, securities or assets as consideration

6

Carve-out and Spin-off

Company A after spinoff

New company BShareholders receive

Shares of company B

Old shareholders still own shares of company A, which now only represent ownership of A without B.

7

Rationales for carve-outs

Kaplan and Weisbach

Change of focus or corporate strategy (40%)

Unit unprofitable or mistake (22%)

Sale to pay off leveraged finance (29%)

Antitrust (2%)

Need cash (3%)

Defend against takeover (1%)

Good price (3%)

Global carve-outs: organisation and HR aspects

We will focus on the most frequent case, whereas the carved-out organisation is then integrated into one or more acquiring organisations.

We will focus on the carve-out planning and execution from an organisation and HR perspectives.

8

In complex global carve-outs, workforce allocation difficulty depends on whether employees belong to:

1) A well defined Division/B.U. or a Country entirely carved out

2) A Core Function, dedicated both to the carved-out organisation and to the original organisation (f.i. Global Sales, Global Services , Global R&D)

3) A Shared Services Function, providing support to both the carved-out and the original organisations. These are normally staff functions (f.i. HR, Finance, Sourcing, EHS)

9

The planning phase: workforce allocation issues

10

Global CEO

Global HRGlobal

Finance

BU 1 BU 2 BU 3 Global Sales

Global Services

Global R&D

Difficulty of workforce allocation in organisations to be carved out:

Low (full carve-out of B.U.)Medium (partial carve-out of core functions)

High (partial carve-out of support functions)


11

BU 3 CEO

BU HR BU Finance

PL 1 PL 2 PL 3 BU Sales

BUServices

BU R&D

Difficulty of workforce allocation in a case of a subsequent carve-out:

Low – Full carve-out of PL to C1 or C2 Medium – Splitted between C1 and C2

High - Splitted between C1 and C2

Future of the BU CEO?


12

1) A well defined Division/B.U. or a Country entirely carved out

This is normally the case of the majority of the employees of the carved Outorganisation who are usually fully allocated to a clearly defined Division/B.U.

Depending on the sector and on the organisation model, employees in B.U.

or Countries entirely carved out can easily be 80% - 85% of the total manpower to be allocated.

Therefore for the majority of employees, workforce allocation difficulty is relatively low

BUT

In case of acquisition by more than one Company, the intention of the buyers

is frequently to proceed to a further separation of Product Lines within the BU,

often with a second carved-out. Then the degree of difficulty may vary again


13

2) A Group Core Function dedicated to both the carved out organisation and to the original organisation (f.i. Global Sales, Global Services, Global R&D)

These global core functions in complex global companies may report at Group level and may comprise employees who are physically located in the Corporate HQ or sometimes at local level in various Countries

Depending on the sector and on the organisation model, employees in these core functions can be 10% - 15% of the total manpower to be allocated

These employees are normally highly critical in the short and long term in the new context


14

3) A Group Shared Services function providing support to both the carved out and to the original organisation (f.i. HR, Finance, Sourcing)

Similarly to the core functions, employees in the Shared Services functions may report at Group level and may be based either at Corporate HQ or locally

Depending on the sector and on the organisation model, employees in these Shared Services can be 5% - 10% of the total manpower to be allocated

• They are normally critical to the carved out organisation in the short term, when the organisation has not been fully integrated in the acquiring Company/ies (f.i. Payroll, Accounts Receivables, all “transactional” functions)

• They become much less critical (redundant?) in the long term, when the acquiring Company/ies have better understood the carved-out organisation and integration has moved forward


15

Focus on allocation of employees in the Group Core Services and Group Shared Services Functions

Employees in the Core Services and Shared Services Functions can be:

• Part of teams fully dedicated to the carved-out organisation. Will be transferred => low/medium difficulty

• Part of teams who are not fully dedicated, but individual employees may be full-time working for the carved-out organisation. Will be transferred => low/medium difficulty

• Part of teams who are not fully dedicated, and individual employees may be only part-time working for the carved-out organisation. Can be transferred (f.i. if they work >50% of time), but difficult allocation decisions => high difficulty


16

The Relocation issue

Employees belonging to a B.U./Country entirely carved out are often already based in the “right” location.

Employees in the Group Core Services and Group Shared Services Functions can be based at Corporate HQ locally in different Countries

The allocation exercise in this case sometimes takes two steps:

1. Workforce allocation: these employees are normally allocated to the carved-out organisation, which follows strictly objective rules

2. Employees allocation: before of after the workforce allocation exercise is made public, individual issues (willingness to relocate, but also availability of relocation or redundancy packages, different career options) may be taken into account and employees and be allocated differently


The Execution phase: People Management Processes

17

Trade Unions: Communication and Consultation processes

The role of T.U. varies substantially from Country to Country depending on the more or less regulated labour environments.

A Country-specific planning has to take place well before the execution phase, with timings, milestones and a high level of HR involvement

Most legislations only require a consultation and information process. In few highly regulated legislations T.U. have a by-law negotiation power

In the EU the Transfers of Undertakings Directive 2001/23 EC provides a common framework in terms of consultation and information, and a specific body (European Works Council) may play a key role

Failure to fully comply with the EU T.U. consultation and information process may block/delay the process

18

Trade Unions: Negotiation processes

T.U. agreement (or at least non opposition) is always critical to avoid any disturbance to normal operations (f.i. strikes, overtime avoidance).

T.U. can play a significant support in sustaining employees morale and customer focus, particularly if social plans are foreseen.

According to a recent Ernst & Young research among 100 Executives experienced in global corporate divestments (Human Capital Carve-out Study strategies of successful sellers, E&Y, 2013), the ideal point to engage in T.U. discussions on carve-outs is:

• After the employees allocation process

• 15 to 30 days before the announcements

• few days before the legal limit


19

Negotiating HR Transitional Services Agreements (TSA’s)

Buyers of a carved-out business expect business operations to continue seamlessly, so HR TSA’s is needed until internal capabilities are developed

It is critical to have an agreement on HR TSA’s to support the carved-out organisation as a condition for the deal, in order to avoid lack of support from the original organisation

The Ernst & Young research shows that the most common HR TSA’s, are:

1.Payroll and Benefits

2.HR Information Systems

3.Pensions

4.General HR support

5.Expats support

6.Recruiting


20

Managing Key People: Communication and Retention Issues

Retaining Key People is, also according to the Ernst & Young research, the N.1 priority, followed by Costs (n.2) and Speed (N.3).

Freezing transfers is the most common practice used by 88% of Executives, of which 72% before the closing)

If the confidentiality of the deal allows, it is considered a best practice to manage early communications with:

• Executive Leadership and Management Teams

• Key employees (f.i. critical R&D or Key Account Managers)

Need to gain early acceptance and engagement of these two groups through a targeted communication before public announcement is made and transfers are frozen, to better retaining Key people in the long term


21

Managing Key People: Communication and Retention Issues

Typical options to retain Key People in a carved-out organisation are:• Retention bonuses (typically in a 2-3 years horizon)• Exceptional Salary increases• Stock-based grants in the acquiring Company/ies• New benefits from the acquiring organisations• Career perspectives (in the carved-out or in the acquiring organisations)

Compensation-based incentives (f.i. Retention Bonuses) are a temporary solution and have little effect on individual engagement and motivation

Career perspectives have a stronger long-term effect on engagement and motivation (at least after the Retention Bonus has been cashed !)


22

Managing all Employees: Communication and Retention Issues

Plan in advance the all-employees Communication strategy at global level, and a related Communication timeframe, conveying few key general messages which can be adapted at local level

Top-down communication from the carved-out or the acquiring organisation (all-employees meetings, formal presentations, welcome days, house organs) is essential to convey the idea of a positive future

However, according to the Ernst & Young research, all-employees retention initiatives rank as follows, in order of successful results:

1. Leverage the Management of the carved out organisation

2. Provide employment or severance protection for the post-close period

3. Top-down communication to articulate the value proposition

4. Retention bonuses for all employees


The Areva T&D Carve-Out

Case History

This Project represents approx. 4bn€ in Enterprise Value

Financial Net Debt at 30.6.09

,

Enterprise Value Agreement with Areva

~ 400M €

1 053M €

2 290M €

• EBITDA 2008: 587M € - 50M€ Minor.

• Part Alstom ~2/3

• Part Schneider Electric ~1/3

•

• Multiple de ~8 x EBITDA* 2009

~ 4 000M €

~ 200M €

Minorities

Finance

*Estimated by Alstom and Schneider Electric

3,3

Enterprise ValuePensions

~ 400M €

1 053M €

2 290M €

•

• Part Alstom ~2/3

• Part Schneider Electric ~1/3

• Adjustment of each part basedon EBITDA of T and D activities

•

~ 4 000M €

~ 200M €

impact

3,3Bn €

Part Schneider Electric ~1/3

In late 2009 the French Multinational Areva, N.1. worldwide in the Nuclear industry and N.3 worldwide in the Energy Transmission & Distribution (T&D) business, decided to dismiss T&D in order to better focus on Nuclear and in order to finance the exit of Siemens from its NP business

In 2010 T&D had a turnover of around 5.6 bn€ and around 33.000 employees worldwide. The T&D business was actually sold in January 2011

The French state, majority owner of Areva, posed 3 conditions to win the bid: Price, Market perspectives and Social perspectives. Final bidders were GE, Toshiba and a consortium Alstom/ Schneider Electric, who won the bid

The consortium would then allocate the Distribution activities (Medium Voltage, about 11.000 employees) to Schneider Electric, while Alstom would keep the Transmission activities (High Voltage, about 22.000 employees)

An innovative Labour Agreement between Alstom, Schneider Electric and the European Federation of Metalworkers (EFM) defined a stringent job security framework (a role for all employees, no plant closures for 2 years)

Case Description: key points

A booming energy market with two different drivers

Distribution & User pointsGeneration & Transmission

Network control

Industry & Infrastructure

ResidentialOther industries & services

Ultra high voltage (UHV) and High voltage (HV) – from 52kV to 1200kVMedium voltage - from 3kV to 52kVLow voltage - < 3kV

Conventional generation

Renewables

UHV

HV MV MV

LVUHV/HV

Decentralized management

LV

Automation andSubstations

Two poles of specialization, with two different sets of dynamics

Renew-able

On-siteStorage

BackupPower

Centralized Generation

Transportation

Residential

Commercial

Industrial

• Major global players

• Large projects

• Focused on utilities

Production Transmission Distribution Consumption

• Global and regional players

• Equipment and product sale

• Multi-clients

Distribution and user points Generation & Transmission

● Two complementary actors for a unified answers which integrates and connects generation with the transmission network

● Takes into account the new generation sources thanks to optimized network management

● Innovative answers in order to propose integrated solutions

Alstom with Areva T

● Consolidation of 2 actors in:

- Primary and secondary Distribution

- Automation and substations

● An answer to the challenge posed by Smart grids with a flexible interface between user points and the distribution network

Schneider Electric MediumVoltage with Areva D

The Alstom – Schneider Electric offer: an answer to energy strategic challenges…

… To create two global leaders

ABB

ProductionHigh

VoltageMedium Voltage

LowVoltage

Siemens

Areva T&D

Schneider Electric

GE

Cooper

Crompton Greaves

XD Group

Alstom

Gen

eral

ists

Spe

cia

lists

Em

ergi

ng

3rd

2nd

1st

1st

2nd

3rd

4th

1st

2nd

4th

3rd

2nd

3nd

1st

4th

Integrated player in Production and Transmission

New n°1 in Medium and Low Voltage

General Scheme: a multi-stage Project

Power

1

Areva Activities

T&D

Trans-mission

Distribu-tion

T&D Separation

Areva T&D Separation

2

Business

Energy

3

Separation of Activities with Medium Voltage

4

2Separation ofActivities withHigh Voltage

Activity Separation Principles, in line with Alstom and Schneider Electric Strategic Interests

Trans-mission

Distribu-tion

Transmission Ultra-High Voltage & High Voltage

Primary and Secondary Distribution

General Principles

Integration of Areva Transmission within Alstom

A new Sector, represented by the President of the Sector at the Executive Committee

Located in Paris region

Preservation of the industrial base

Preservation of the ISO commercial network

Organisation by Sector of the future combined Group

Alstom

Power Transmission Transport

A new Energy business focused on utilities and electro-intensive industries

Key market segments

Key product lines

• Utilities• Oil and gas

Areva D€ 1.7 bn

IT

Power

(MV +LV )

Buildings

IT

Power

Industry

Buildings

Energy

5 Businesses

critical power & cooling

LV Power

Industrial automation

Buildingautomation& security

MVdistribution

IS&C

Grid Automation

• Retail• Hotels• Hospitals• Offices

• Data centers• Bank / Insurance

• Residential• Marine

4 Businesses

€ 4.6 bn

Industry• OEMs • Water• Mining

CST

Objective

Prior to the final offer, Alstom and Schneider Electric have entered into

a Consortium Agreement setting out the key principles of:

The joint acquisition of Areva T&D

The allocation and separation of T and D activities

The management of each activity during the transition period

Joint Acquisition

At Closing, acquisition of Areva T&D by a joint acquisition vehicle

(“AS5”)

AS5 financed by Alstom and Schneider Electric pro-rata to the

respective contribution of T and D activities to the EBITDA (i.e.

approximately 2/3 for T and 1/3 for D)

Then, progressive transfer of D activities to Schneider Electric

Allocation

All Areva T&D’s activities allocated to either Alstom or Schneider Electric and no “orphan” employees

Provisional allocation agreed upon between Alstom and Schneider Electric, and to be confirmed/adjusted based on further exchanges with Areva T&D

Such provisional allocation to be discussed separately through a tri-partite working group

Separation

Transfer of D activities to Schneider Electric as soon as feasible/practicable, taking into account the need to:

Ensure business continuityPreserve the value of each of T and D activitiesRespect the rights of employee representativesMake this transfer compliant with social legal requirements

Management during Transition Period

From Closing:

T activities exclusively managed by Alstom

D activities exclusively managed by Schneider Electric

Management Committee to manage/coordinate joint decisions

regarding both T and D activities during the transition period until

their transfer to either Alstom or Schneider Electric

Industrial base

High Voltage product lines remain with Alstom

Medium voltage product lines are transferred to Schneider

Electric

- Either through the transfer of a legal entities or sites

- Or through the transfer of carved-out elements

Employment contracts will be transferred accordingly

When sites will be shared, common services could be maintained

Alstom

SchneiderElectric

Commercial network

The majority of employees in local teams are in effect specialized in T

or D – their allocation is natural

For the employees which are not specialized in T or D, in particular within

commercial functions :

Power generation, Transmission, rail transportation and aluminum

activities remain with Alstom

Distribution, oil & gas, mining and heavy industries will be transferred to

Schneider Electric

The management of these teams will be associated to the allocation

process of the employees who are not specialized

Alstom

SchneiderElectric

R&D

The majority of employees in local teams are in effect

specialized in T or D – their allocation is natural

The management of the R&D teams will be associated to the

allocation process of the employees who are not specialized

Support Functions and Shared Services (at Corporate / Country level)

Support functions will be allocated to Alstom and Schneider

Electric based on their respective weights. The management of

the T&D teams involved will be associated to the allocation

process

For Shared Services, an option will remain to maintain service to

transferred activities, which is made possible as there is no

overlap between Alstom and Schneider Electric

For the majority of activities, « natural separation » basing on activity predominance = ~ 85% of Areva T&D employees A

Allocation by reporting Units

following Economic rationales

B

Allocation principally linked to

competences and Market Segments

CSupport

Functions

ISO (Global Sales Force): • Allocation by Country• Majority of Sales Force actually specialized in T or D• Link to Market Segments :

o Within Alstom: Power Generation, Transmission, Rail, Aluminiumo Within Schneider Electric: Distribution, Oil&Gas, Mining and Heavy Industry

Service : • Allocation linked to technical competences and product knowledge

R&D: • Natural allocation for the majority of R&D activities

Shared Services : • As much as possible, keep Shared Services unity, to avoid value destruction

and disorganisation: either within Alstom or within Schneider Electric

Support Functions to Regions & to BU, ISO and R&D : • Study to identify the main activities served (T or D)• On a case by case basis, keep integrity and operational consistency

Support Functions based in La Défense HQ: • Separation based on activities needs of the two Groups, based on a 70% - 30%

ratio• Proposal for a Pilot Project limited to HQ-based HR and Finance (~100

employees) : use of simple allocation principes, to be validated in view of their extension on larger scale

Impact on Employment: 3 Different Situations

A coherent split of the activities

Secondary Distribution

Ultra High Voltage

Transmission

High Voltage Transmission

Primary Distribution

Products

Services

GIS & Circuit breakers MV switchgears

Power transformers

HV substations Proximity business

EMS / DMS

SAS

MV installed baseHV installed base

Power electronics

Distribution transformers

HV relays MV relays

Prefabricated substationHV instrument transformers

Disconnectors

Primary substation

Alstom

Schneider Electric

Under review

Automation

Systems

Impact on Employment: 3 Different Situations

220

3 90017 580

JV Protection

1 070NMS

520

1 180 2 090

7 330

250

10 000

2 830

320

740

590

1 870 1 180 2 090

0 %

3 350

100 %20 % 40 % 60 % 80 %

3 270

8 070+

PACIS

14 490

29 970

Total

To be allocated

Pure SEI

Pure Alstom

Products Automation Systems Services

Support FunctionsISOTotal

PACIS

SEI mixJV Protection

Alstom mix

SDSU

What about me?

At Closing, all employees remain employed by the same legal entities.

The acquisition vehicle is the new shareholder of legal entities

Employment contracts remain unchanged

Social commitments become effective

Sound social commitments

Alstom and Schneider do not foresee any restructuring linked to this acquisition

Alstom and Schneider will propose a professional future to each and every employee. All employees will have a proposal of an equivalent position (same geographical area, grade, seniority, remuneration)

Until early 2013, there will be no site closure in Europe (except plans communicated to the employees before the sale agreement) and no mass redundancy departures other than voluntary (except in the case of a significant downturn in the general economic conditions)

Alstom and Schneider are working closely with the management of AREVA T&D, in order to lead to a rapid integration

Overall timetable

Comex meeting

Top 60 meeting

EWF / Works councils

Antitrust

Preparation of separation with

Areva and PMI*

PMI* workgroups kick off

PMI*

India (Public offer)

Business Continuity

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

05/01

ClosingSigningKey milestones 01 December

Dec

15/12

17/12 (Areva) and 18/12 (T&D)

Disposal Separation / Integration

*PMI: Post Merger IntegrationJan. 5

Majority of legal separations completed. Effective transferdates below

2010 2011

Letters available for communicating legal entity

name changes to stakeholders. See Regional Communications

and Regional Legal.

50

Thank you !

Amsterdam may13 v3_picconi

Business

Transcript of Amsterdam may13 v3_picconi