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managing complex global carve-outs. a case study and lessons learned from an HR and organisational perspective. the Areva T&D case

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Amsterdam may13 v3_picconi

  1. 1. 1MANAGING COMPLEX GLOBAL CARVE-OUTSA CASE STUDY AND LESSONS LEARNED FROM AN HR ANDORGANISATIONAL PERSPECTIVE5 Merger IntegrationManagement ForumAmsterdam, Sheraton SchipolMay 14th, 2013Francesco Picconi
  2. 2. Introducing Francesco PicconiGroup Head of HR at Falck, ItalyHR Director, South Europe & Africa, Areva T&D, ItalyHR Director, BU Corus Colors, Corus Group, UKGroup OD Director, Indesit Company, ItalyHR Director BU, Transolver/Fraikin, Fiat Iveco, FranceOD Manager, Automotive Lighting, Fiat Magneti Marelli, GermanyHR Manager Global Marketing and Sales, GE Oil&Gas, ItalyBUT MOST IMPORTANTLY……A Multicultural HR passionate for M&A, JV, Post-Mergers Integrationin International/ Global Phone +39 335 5351875
  3. 3. 3What is a carve-outA carve-out is the process through which a Company divestssubsidiaries, divisions, B.U.’s, assets to:- another company- a combination of companies- individualsin exchange for cash, securities or assets as consideration
  4. 4. 4The buyer can be:- - another Company (acquisition)- - a combination of Companies in view of a joint managementor 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. 5. 5Carve-out and AcquisitionCompany Aw/o subsidiary BOld Sub BCompany CCash, securities orassets as consideration
  6. 6. 6Carve-out and Spin-offCompany Aafter spinoffNewcompany BShareholders receiveShares of company BOld shareholders still own shares of company A,which now only represent ownership of A without B.
  7. 7. 7Rationales for carve-outsKaplan and WeisbachChange 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%)
  8. 8. Global carve-outs: organisation and HR aspectsWe will focus on the most frequent case, whereas the carved-out organisation is then integrated into one or more acquiringorganisations.We will focus on the carve-out planning and execution from anorganisation and HR perspectives.8
  9. 9. In complex global carve-outs, workforce allocation difficultydepends on whether employees belong to:1) A well defined Division/B.U. or a Country entirely carved out2) A Core Function, dedicated both to the carved-outorganisation and to the original organisation (f.i. Global Sales,Global Services , Global R&D)3) A Shared Services Function, providing support to both thecarved-out and the original organisations. These are normallystaff functions (f.i. HR, Finance, Sourcing, EHS)9The planning phase:workforce allocation issues
  10. 10. 10Global CEOGlobal HRGlobalFinanceBU 1 BU 2 BU 3GlobalSalesGlobalServicesGlobalR&DDifficulty 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)The planning phase:workforce allocation issues
  11. 11. 11BU 3 CEOBU HR BU FinancePL 1 PL 2 PL 3BUSalesBUServicesBU R&DDifficulty of workforce allocation in a case of a subsequent carve-out:Low – Full carve-out of PL to C1 or C2Medium – Splitted between C1 and C2High - Splitted between C1 and C2Future of the BU CEO?The planning phase:workforce allocation issues
  12. 12. 121) A well defined Division/B.U. or a Country entirely carved outThis 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 totalmanpower to be allocated.Therefore for the majority of employees, workforce allocation difficulty isrelatively lowBUTIn case of acquisition by more than one Company, the intention of the buyersis 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 againThe planning phase:workforce allocation issues
  13. 13. 132) A Group Core Function dedicated to both the carved outorganisation and to the original organisation (f.i. GlobalSales, Global Services, Global R&D)These global core functions in complex global companies may report atGroup level and may comprise employees who are physically located inthe Corporate HQ or sometimes at local level in various CountriesDepending on the sector and on the organisation model, employees inthese core functions can be 10% - 15% of the total manpower to beallocatedThese employees are normally highly critical in the short and long term inthe new contextThe planning phase:workforce allocation issues
  14. 14. 143) A Group Shared Services function providing support to both thecarved out and to the original organisation (f.i. HR, Finance, Sourcing)Similarly to the core functions, employees in the Shared Services functionsmay report at Group level and may be based either at Corporate HQ or locallyDepending on the sector and on the organisation model, employees in theseShared Services can be 5% - 10% of the total manpower to be allocated• They are normally critical to the carved out organisation in the shortterm, when the organisation has not been fully integrated in the acquiringCompany/ies (f.i. Payroll, Accounts Receivables, all “transactional” functions)• They become much less critical (redundant?) in the long term, when theacquiring Company/ies have better understood the carved-out organisationand integration has moved forwardThe planning phase:workforce allocation issues
  15. 15. 15Focus on allocation of employees in the Group Core Services and GroupShared Services FunctionsEmployees in the Core Services and Shared Services Functions can be:• Part of teams fully dedicated to the carved-out organisation. Will betransferred => low/medium difficulty• Part of teams who are not fully dedicated, but individual employees may befull-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 beonly part-time working for the carved-out organisation. Can be transferred (f.i.if they work >50% of time), but difficult allocation decisions => high difficultyThe planning phase:workforce allocation issues
  16. 16. 16The Relocation issueEmployees belonging to a B.U./Country entirely carved out are oftenalready based in the “right” location.Employees in the Group Core Services and Group Shared ServicesFunctions can be based at Corporate HQ locally in different CountriesThe allocation exercise in this case sometimes takes two steps:1. Workforce allocation: these employees are normally allocated to thecarved-out organisation, which follows strictly objective rules2. Employees allocation: before of after the workforce allocation exercise ismade public, individual issues (willingness to relocate, but also availability ofrelocation or redundancy packages, different career options) may be takeninto account and employees and be allocated differentlyThe planning phase:workforce allocation issues
  17. 17. The Execution phase:People Management Processes17Trade Unions: Communication and Consultation processesThe role of T.U. varies substantially from Country to Country depending onthe more or less regulated labour environments.A Country-specific planning has to take place well before the executionphase, with timings, milestones and a high level of HR involvementMost legislations only require a consultation and information process. In fewhighly regulated legislations T.U. have a by-law negotiation powerIn the EU the Transfers of Undertakings Directive 2001/23 EC provides acommon framework in terms of consultation and information, and a specificbody (European Works Council) may play a key roleFailure to fully comply with the EU T.U. consultation and information processmay block/delay the process
  18. 18. 18Trade Unions: Negotiation processesT.U. agreement (or at least non opposition) is always critical to avoid anydisturbance to normal operations (f.i. strikes, overtime avoidance).T.U. can play a significant support in sustaining employees morale andcustomer focus, particularly if social plans are foreseen.According to a recent Ernst & Young research among 100 Executivesexperienced in global corporate divestments (Human Capital Carve-outStudy strategies of successful sellers, E&Y, 2013), the ideal point to engagein T.U. discussions on carve-outs is:• After the employees allocation process• 15 to 30 days before the announcements• few days before the legal limitThe Execution phase:People Management Processes
  19. 19. 19Negotiating HR Transitional Services Agreements (TSA’s)Buyers of a carved-out business expect business operations to continueseamlessly, so HR TSA’s is needed until internal capabilities are developedIt is critical to have an agreement on HR TSA’s to support the carved-outorganisation as a condition for the deal, in order to avoid lack of support fromthe original organisationThe Ernst & Young research shows that the most common HR TSA’s, are:1.Payroll and Benefits2.HR Information Systems3.Pensions4.General HR support5.Expats support6.RecruitingThe Execution phase:People Management Processes
  20. 20. 20Managing Key People: Communication and Retention IssuesRetaining Key People is, also according to the Ernst & Young research, theN.1 priority, followed by Costs (n.2) and Speed (N.3).Freezing transfers is the most common practice used by 88% ofExecutives, of which 72% before the closing)If the confidentiality of the deal allows, it is considered a best practice tomanage 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 groupsthrough a targeted communication before public announcement is madeand transfers are frozen, to better retaining Key people in the long termThe Execution phase:People Management Processes
  21. 21. 21Managing Key People: Communication and Retention IssuesTypical 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 temporarysolution and have little effect on individual engagement and motivationCareer perspectives have a stronger long-term effect on engagement andmotivation (at least after the Retention Bonus has been cashed !)The Execution phase:People Management Processes
  22. 22. 22Managing all Employees: Communication and Retention IssuesPlan in advance the all-employees Communication strategy at global level,and a related Communication timeframe, conveying few key generalmessages which can be adapted at local levelTop-down communication from the carved-out or the acquiring organisation(all-employees meetings, formal presentations, welcome days, houseorgans) is essential to convey the idea of a positive futureHowever, according to the Ernst & Young research, all-employees retentioninitiatives rank as follows, in order of successful results:1. Leverage the Management of the carved out organisation2. Provide employment or severance protection for the post-close period3. Top-down communication to articulate the value proposition4. Retention bonuses for all employeesThe Execution phase:People Management Processes
  23. 23. The Areva T&D Carve-OutCase History
  24. 24. This Project represents approx. 4bn€ inEnterprise ValueFinancialNet Debt at30.6.09,Enterprise ValueAgreement withAreva~ 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 €MinoritiesFinance*Estimated by Alstom and Schneider Electric3,3Enterprise 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 €impact3,3Bn €Part Schneider Electric ~1/3
  25. 25. In late 2009 the French Multinational Areva, N.1. worldwide in the Nuclearindustry 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 inorder to finance the exit of Siemens from its NP businessIn 2010 T&D had a turnover of around 5.6 bn€ and around 33.000employees worldwide. The T&D business was actually sold in January 2011The French state, majority owner of Areva, posed 3 conditions to win thebid: Price, Market perspectives and Social perspectives. Final bidders wereGE, Toshiba and a consortium Alstom/ Schneider Electric, who won the bidThe consortium would then allocate the Distribution activities (MediumVoltage, about 11.000 employees) to Schneider Electric, while Alstom wouldkeep the Transmission activities (High Voltage, about 22.000 employees)An innovative Labour Agreement between Alstom, Schneider Electric andthe European Federation of Metalworkers (EFM) defined a stringent jobsecurity framework (a role for all employees, no plant closures for 2 years)Case Description: key points
  26. 26. A booming energy market with two differentdriversDistribution & User pointsGeneration & TransmissionNetwork controlIndustry & InfrastructureResidentialOther industries& servicesUltra high voltage (UHV) and High voltage (HV) –from 52kV to 1200kVMedium voltage - from 3kV to 52kVLow voltage - < 3kVConventional generationRenewablesUHVHV MV MVLVUHV/HVDecentralized managementLVAutomation andSubstations
  27. 27. Two poles of specialization, with two differentsets of dynamicsRenew-ableOn-siteStorageBackupPowerCentralizedGenerationTransportationResidentialCommercialIndustrial• Major global players• Large projects• Focused on utilitiesProduction Transmission Distribution Consumption• Global and regional players• Equipment and product sale• Multi-clients
  28. 28. Distribution and user pointsGeneration & Transmission● Two complementary actors fora unified answers whichintegrates and connectsgeneration with thetransmission network● Takes into account the newgeneration sources thanks tooptimized networkmanagement● Innovative answers in order topropose integrated solutionsAlstomwith Areva T● Consolidation of 2 actorsin:- Primary and secondaryDistribution- Automation andsubstations● An answer to the challengeposed by Smart grids witha flexible interface betweenuser points and thedistribution networkSchneider Electric MediumVoltage with Areva DThe Alstom – Schneider Electric offer: ananswer to energy strategic challenges…
  29. 29. … To create two global leadersABBProductionHighVoltageMediumVoltageLowVoltageSiemensAreva T&DSchneiderElectricGECooperCromptonGreavesXD GroupAlstomGeneralistsSpecialistsEmerging3rd2nd1st1st2nd3rd4th1st2nd4th3rd2nd3nd1st4thIntegrated player in Productionand TransmissionNew n 1 in Medium and LowVoltage
  30. 30. General Scheme: a multi-stage ProjectPower1Areva ActivitiesT&DTrans-missionDistribu-tionT&D SeparationAreva T&D Separation2BusinessEnergy3Separation ofActivities withMedium Voltage42Separation ofActivities withHigh Voltage
  31. 31. Activity Separation Principles, in line with Alstomand Schneider Electric Strategic InterestsTrans-missionDistribu-tionTransmission Ultra-High Voltage &High VoltagePrimary andSecondaryDistributionGeneral Principles
  32. 32. Integration of Areva Transmission withinAlstomA new Sector, represented by the President of the Sector at theExecutive CommitteeLocated in Paris regionPreservation of the industrial basePreservation of the ISO commercial networkOrganisation by Sector of the future combined GroupAlstomPower Transmission Transport
  33. 33. A new Energy business focused on utilitiesand electro-intensive industriesKey marketsegmentsKey productlines• Utilities• Oil and gasAreva D€ 1.7 bnITPower(MV+LV )BuildingsITPowerIndustryBuildingsEnergy5 Businessescriticalpower &coolingLV PowerIndustrialautomationBuildingautomation& securityMVdistributionIS&CGridAutomation• Retail• Hotels• Hospitals• Offices• Data centers• Bank / Insurance• Residential• Marine4 Businesses€ 4.6 bnIndustry• OEMs• Water• MiningCST
  34. 34. ObjectivePrior to the final offer, Alstom and Schneider Electric have entered intoa Consortium Agreement setting out the key principles of:The joint acquisition of Areva T&DThe allocation and separation of T and D activitiesThe management of each activity during the transition period
  35. 35. Joint AcquisitionAt Closing, acquisition of Areva T&D by a joint acquisition vehicle(“AS5”)AS5 financed by Alstom and Schneider Electric pro-rata to therespective 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
  36. 36. AllocationAll Areva T&D’s activities allocated to either Alstom or SchneiderElectric and no “orphan” employeesProvisional allocation agreed upon between Alstom andSchneider Electric, and to be confirmed/adjusted based on furtherexchanges with Areva T&DSuch provisional allocation to be discussed separatelythrough a tri-partite working group
  37. 37. SeparationTransfer of D activities to Schneider Electric as soon asfeasible/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
  38. 38. Management during Transition PeriodFrom Closing:T activities exclusively managed by AlstomD activities exclusively managed by Schneider ElectricManagement Committee to manage/coordinate joint decisionsregarding both T and D activities during the transition period untiltheir transfer to either Alstom or Schneider Electric
  39. 39. Industrial baseHigh Voltage product lines remain with AlstomMedium voltage product lines are transferred to SchneiderElectric- Either through the transfer of a legal entities or sites- Or through the transfer of carved-out elementsEmployment contracts will be transferred accordinglyWhen sites will be shared, common services could be maintainedAlstomSchneiderElectric
  40. 40. Commercial networkThe majority of employees in local teams are in effect specialized in Tor D – their allocation is naturalFor the employees which are not specialized in T or D, in particular withincommercial functions :Power generation, Transmission, rail transportation and aluminumactivities remain with AlstomDistribution, oil & gas, mining and heavy industries will be transferred toSchneider ElectricThe management of these teams will be associated to the allocationprocess of the employees who are not specializedAlstomSchneiderElectric
  41. 41. R&DThe majority of employees in local teams are in effectspecialized in T or D – their allocation is naturalThe management of the R&D teams will be associated to theallocation process of the employees who are not specialized
  42. 42. Support Functions and Shared Services(at Corporate / Country level)Support functions will be allocated to Alstom and SchneiderElectric based on their respective weights. The management ofthe T&D teams involved will be associated to the allocationprocessFor Shared Services, an option will remain to maintain service totransferred activities, which is made possible as there is nooverlap between Alstom and Schneider Electric
  43. 43. For the majority of activities, « natural separation » basing on activitypredominance = ~ 85% of Areva T&D employeesAAllocation byreporting UnitsfollowingEconomicrationalesBAllocationprincipallylinked tocompetencesand MarketSegmentsC SupportFunctions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 destructionand 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 (~100employees) : use of simple allocation principes, to be validated in view of theirextension on larger scaleImpact on Employment: 3 Different Situations
  44. 44. A coherent split of the activitiesSecondaryDistributionUltra HighVoltageTransmissionHigh VoltageTransmissionPrimaryDistributionProductsServicesGIS & Circuit breakers MV switchgearsPower transformersHV substations Proximity businessEMS / DMSSASMV installed baseHV installed basePower electronicsDistribution transformersHV relays MV relaysPrefabricated substationHV instrument transformersDisconnectorsPrimary substationAlstomSchneider ElectricUnder reviewAutomationSystems
  45. 45. Impact on Employment: 3 Different Situations2203 90017 580JV Protection1 070NMS5201 180 2 0907 33025010 0002 8303207405901 870 1 180 2 0900 %3 350100 %20 % 40 % 60 % 80 %3 2708 070+PACIS14 49029 970TotalTo beallocatedPure SEIPure AlstomProducts Automation Systems ServicesSupportFunctionsISOTotalPACISSEI mixJV ProtectionAlstom mixSDSU
  46. 46. What about me?At Closing, all employees remain employed by the same legalentities.The acquisition vehicle is the new shareholder of legal entitiesEmployment contracts remain unchangedSocial commitments become effective
  47. 47. Sound social commitmentsAlstom and Schneider do not foresee any restructuring linked tothis acquisitionAlstom and Schneider will propose a professional future to eachand every employee. All employees will have a proposal of anequivalent position (same geographical area, grade, seniority,remuneration)Until early 2013, there will be no site closure in Europe (exceptplans communicated to the employees before the sale agreement)and no mass redundancy departures other than voluntary (exceptin the case of a significant downturn in the general economicconditions)Alstom and Schneider are working closely with the managementof AREVA T&D, in order to lead to a rapid integration
  48. 48. Overall timetableComex meetingTop 60 meetingEWF / Works councilsAntitrustPreparation of separation withAreva and PMI*PMI* workgroups kick offPMI*India (Public offer)Business ContinuityJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec05/01ClosingSigningKey milestones 01 DecemberDec15/1217/12 (Areva) and 18/12 (T&D)Disposal Separation / Integration*PMI: Post Merger IntegrationJan. 5
  49. 49. Majority of legal separationscompleted. Effective transferdates below2010 2011Letters available for communicatinglegal entity name changes tostakeholders. See RegionalCommunications and Regional Legal.
  50. 50. 50Thank you !