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The Great Divide

When corporations split off divisions or businesses, the benefits can be huge, but only if HR plays a critical role and follows some crucial rules.

Wednesday, November 1, 2006
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Nationally well-regarded human resource executive Jean Halloran, today firmly ensconced as a top officer at Agilent Technologies, vividly recalls when her high-tech test-and-measurement company split from Hewlett-Packard in 1999, still a large company but definitely the David to the HP Goliath in the equation.

Halloran, who today at 53 is senior vice president of human resources of her Santa Clara, Calif.-based company, says: "Working on the separation of Agilent from Hewlett-Packard was, without a doubt, the most intense, challenging and the most fun [experience] I've ever had in my career."

Halloran's view of holding down the HR function in a corporate split-up is echoed by Deborah E. Barber, who has worked both sides of the HR fence, currently as a principal at the San Francisco-based Jackson Hole Group consulting firm and formerly as vice president of HR and corporate services for San Jose, Calif.-based Quantum Corp. in the years leading up to that company's split-up of its disk-drive and data-storage-systems businesses in 2000.

"I think split-ups and mergers are the most challenging tasks a human resource executive can take on," says Barber. "At least in my experience, there are no how-to books in this area, because you're dealing with such massive dislocation for your employees and [trying to figure out] how to do it in a way that the business doesn't stumble in the process."

Laurie Siegel, senior vice president of human resources and internal communication at Princeton, N.J.-based Tyco International, says being the top HR executive in a corporate split-up is particularly challenging because you have to wear two hats. While separation can be a full-time job, it is important to know that your "real job" doesn't go away. She knows the challenge well.

In January, Tyco's board of directors approved the split-up of the company into three separate corporations. Siegel will be overseeing the HR function at the largest of the three, which will be comprised of the current Fire & Security and Engineered Products & Services divisions, and headed up by Tyco CEO Ed Breen.

On one front, says Siegel, the top HR executive "has to look with the wide lens at the whole organization and say, particularly for the companies that will be separated, what kinds of capabilities they need to be fully functional on day one."

On the second front, "You need to continue to support the corporate organization to ensure that current work gets done reliably and with high quality. Looking forward is important, but not at the expense of today's customers and needs."

The big news about corporate split-ups for human resource executives is that the number and complexity of these deals is almost inevitably going to escalate due to certain dominant conditions in today's financial marketplace. Says Len Gray, Chicago-based leader of Mercer Human Resource Consulting's mergers and acquisition practice in the Americas: "We are seeing organizations taking a very careful look at their business strategy, and, in many instances, that results in the conclusion that there are certain parts of their business that are not core for the future -- therefore, some sort of split-off makes sense."

In addition, says Gray, there is an enormous amount of equity capital at play in financial deal-making markets, creating the opportunity to split off parts of an existing company, big or small.

Given the rising importance and intricacy of these corporate split-ups, all senior human resource officers and outside consultants interviewed for this article emphasized that the top HR executive must be a key player in the drama of a corporate split-up -- and right from the start.

Steve Allan, a New York-based principal at the Towers Perrin consulting firm, where he serves as the mergers and acquisition leader in North America and as part of the firm's global group, says point blank: "One of the key roles for human resource executives in a split-up is, early on, to make sure human resources has a seat at the top table.

The HR function must insist on being an equal partner with the people who make up the core team for the business separation, because what too often happens is that HR gets told, 'Just go in and sort out the details.' And it's never as easy as that."

Obviously each corporate split-up presents an enormous, well-variegated -- and thus unique -- challenge. But there are some essential rules to live by:

Rule No. 1: Anything that has to do with compensation, especially executive compensation (and even more specifically, any kind of stock or stock options) must be the HR executive's chief preoccupation in a split-up.

"Far and away the trickiest and most complicated thing to figure out from an HR perspective is the handling of equity," says Halloran, who has been on both sides of corporate split-ups. "How are stock and stock options going to be separated? Any option holder wants to know that immediately."

What makes handling communication about stock and stock options a tricky and delicate challenge for an HR executive, says Halloran, is that companies must at all times conform with regulations requiring that communications go to all shareholders at once, not to any one subset first.

This underscores a larger challenge for human resource executives involved with a corporate split-up. For any new businesses emerging from a split-up, says Tony Provenzano, counsel at the Washington law firm of Miller & Chevalier, "If the new company goes public, the HR function is going to have a whole new set of pressures and restrictions, such as SEC reporting for executive compensation, deduction limits for compensation over $1 million and, especially, insider-trading restrictions for its officers. The effects of becoming a public company are going to ripple through benefits in a number of different ways, and HR needs to be prepared for that."

Beyond the immediate and pressing issues surrounding options for executives, employees at all levels want to know how they are likely to be treated, compensation-wise, vis-à-vis employees going with other entities in a split-up.

Anthony G. Ambrosio, executive vice president of human resources and administration and one of the leading executives at New York-based CBS Corp., offers some overall advice on compensation for HR executives who find themselves facing a situation similar to the one he was in when CBS and Viacom split up effective Jan. 1.

"As you're looking at splitting the organization, you must try to ensure that the compensation playing field is level when employees are considering which piece of the separating company they want to join up with; otherwise you will have distortions in the process that you don't want," Ambrosio says.

Lisa A. Van Fleet, St. Louis-based employee benefits practice leader for the Bryan Cave LLP international law firm, notes that it's not uncommon for executives to inadvertently lose certain employment guarantees because of a shift in the nature of the business from its previous structure to the new entity.

"I worked on a case recently that had all the consequences of an unapproved termination for the executives involved," she says. The executives need to know beforehand whether this event is going to trigger a forfeiture of their various compensation arrangements, and then they need to know what paths of action may be available to them, says Van Fleet.

Rule No. 2: Take a comprehensive workforce inventory and create a steering committee immediately.

It's a must, says Siegel. Immediately after the board's approval of the Tyco split-up, Siegel swung into action, creating an HR overview committee and a network of subcommittees. In all, Siegel has 14 HR teams working on various aspects of the transition.

"Each has a charter, milestones and deliverable dates," she says, "and they conduct meetings every other week that review where we are, and where we may be running into obstacles. It's a very disciplined planning process."

At CBS, adds Ambrosio, his steering committee worked with the most senior management of the company -- a director or combination of directors -- to make sure everybody's goals were in alignment as much and as often as possible.

"The role of the top HR executive would be to lead the steering committee and certain members of the subcommittees," says Ambrosio. "Beyond that formal role, the top HR person should play an informal role in making sure that the various committees in the overall committee structure are functioning effectively."

Rule No. 3: Communicate whenever and wherever you can -- but not prematurely or based on hype.

"I have never had any CEO or senior human resource person say, ever, that we communicated too much in a situation like this," says Mercer's Gray. "I think what organizations can say is, 'We want you to be informed. There are still lots of things to be resolved, but here's what we know. And here's how we will be resolving those things that we don't know and what we anticipate the timing on our communication to you about those things will be.'"

The communications challenge is enormous, says Wayne F. Cascio, management professor at the University of Colorado-Denver. He recommends a "multimedia" approach to communicating with all parties in a corporate split-up: employees, shareholders, customers and analysts, among others.

"You have to keep hitting people with the same message, but from different angles," he says. "And most importantly, from a management perspective, you always have to be prepared to deal with employees asking, 'OK, we've got a new business model, so what are the new rules? What do I have to do to be successful here?' "

Whatever kind of touchstones there are -- such as customer intimacy, speed or innovation -- management has to build them into performance reviews. "Otherwise, if people don't see any links between what management is saying and what they're being held responsible for, then there's no incentive for employees to knock themselves out," says Cascio.

As behemoth Tyco International moves to finalize splitting into three businesses within the next year or so as part of an 18-month process begun early this year, Siegel and her HR team have put together an elaborate yet flexible communications structure poised to regularly put out a steady stream of messages through various mediums.

Immediately after Breen announced the split-up plan, Siegel and her team launched Web sites to deal with employees' most frequently asked questions.

But, she notes, Web sites reach only certain segments of the giant and highly diversified company's employee population.

So, like Cascio, Ambrosio and others interviewed for this article, Siegel is a devotee of the multimedia approach. "A lot of retention [involves] reaching out to people in various ways," she says. "Beyond the Web sites, we've been doing town hall meetings, small-group luncheons and 'Business Day' events, which allow our employees to hear directly from our business leaders about what is going on in the field."

Rule No. 4: Keeping and recruiting talent is a pre-Day One priority -- especially identifying talent in sometimes unexpected places.

Retention and recruiting are double-edged swords at a start-up that resulted from a split-up. On the one hand, as soon as word gets out that a company is dividing, headhunters and executive recruiters pounce, hoping to take advantage of inevitable insecurity at the company.

On the other hand, a new entity -- such as what is emerging at Tyco -- generates great excitement and stirs a sense of opportunity among ambitious people wanting to join the new businesses being created.

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Stewart Gill, a principal of the Jackson Hole Group and a key driving force in the execution of the billion-dollar split-off of Palm Inc. from 3Com in 1999-2000, argues that the key to successful talent retention and recruitment is for all members of the management team, including the top HR executive, to get clarity on the new business up front so people know what they're getting into -- whether in terms of retaining or recruiting.

Gill says it is critical for the new management team to be clear about "what the new deal is" and what that means for the new culture of the organization.

"The leadership team must be clear about all the dimensions of what the culture is," says Gill. "What is our value proposition? What are the core values of the new organization? You must be clear about what's going to be different from the past."

From a "lessons learned" at 3Com, Gill says, having a good performance management system in place as early as possible in a corporate split-up helps ensure that people are held accountable for results that are aligned with key business outcomes.

In more practical terms, what HR can and should do is identify talent at all levels and in all parts of the company, Gill says. "HR executives have to make sure that they know who the gems of the organization are in terms of talent. That is one of the most critical HR functions in a split-up and it's not easy because they may not be the obvious ones."

If you don't get off to a fast start, Gill adds, one of the consequences is that you could lost some key talent right away because the minute this split-up is announced, the best search firms and others will be out trying to nab your best talent.

When Agilent split off from Hewlett-Packard, Halloran and CEO Ned Barnholt got some talent-recruitment advice from an intriguing source: Carly Fiorina, who, by then, had led the spin-off of Lucent Technologies from AT&T, but had not yet become CEO of H-P.

Fiorina advised that the new company being formed in a split-up would actually be at an advantage in terms of staffing because the original company would naturally want to retain its department heads and other key officials. " 'Go for the hungry No. 2s,' " Halloran recalls Fiorina counseling.

"Carly said, 'Pick fewer employees than you think you'll need, but go for the most risk-tolerant, most creative, most ambitious people,' " says Halloran. "We were looking for the people who wanted the greatest challenge. Of course, we were fortunate we were being split off from such a remarkable company."

Rule No. 5: Learning partnerships pay big dividends.

"Job-shadowing" is a vital tool in readying all HR officials for a corporate split-up. Ambrosio puts it this way: "If there is going to be an orderly division of employee talent between separating entities, then it is essential to engender a close working partnership between the persons who will be heading up HR at each entity following the separation."

Siegel places a major premium on this kind of partnership among the HR people who will be splitting up -- what she calls "the knowledge transfer process" at Tyco.

Speaking of the separate heads of HR of the three businesses that are being created out of what was Tyco, she says: "We have made a commitment to work together, to pick up the phone when necessary and say, 'Did you know?' There's a lot of that going on right now."

Rule No. 6: Be vigilant about real-estate relocation issues.

"Once you really get into the specifics of personnel and real-estate relocation issues, you'll find that, in the practical realities of things, you're oftentimes not able to separate long-term leases from other matters as quickly as you'd like," says Ambrosio, who -- in the split-up of CBS and Viacom -- took on real-estate and facilities-management duties that carry over to this day. The challenge of creating new leasing arrangements is particularly complicated, and can take a longer-than-expected amount of time to resolve when there is "co-located space" involved, says Ambrosio.

To settle long-term leasing issues as effectively as possible, Ambrosio says, the top HR executive must establish good partnerships with the head of real estate, facility management as well as the head of IT to work out basic blocking and tackling issues such as mailroom functions, print work and graphics until longer-term arrangements can be settled.

"The HR executives," he says, "whether they have the administrative responsibilities or not, have to work in close partnership with the people who do, to try to plan for and work through those issues with the least amount of disruption."

Rule No. 7: 40l(k) plans are clearly the preferred path for providing retirement benefits in a split-up, but defined-benefit plans must be carefully tended to.

Van Fleet and others say 401(k) plans are clearly the way of the present and future for split-ups and other forms of corporate restructurings when it comes to providing retirement benefits.

"It's absolutely the long-established trend," Van Fleet says, noting that, from a company's standpoint, 401(k) plans are not only easier and less expensive to administer than defined-benefit plans, but their funding costs are significantly more predictable.

The downside of 40l(k) plans, she adds, is that they do not afford employees the type of retirement security they might find desirable -- guaranteed lifetime benefits. Rather, defined-contribution plans provide an employee with a lump sum of money which he or she must invest, manage and budget over his or her retirement years.

***

As many HR executives who have been through a corporate split-up will testify, split-ups can be extremely -- and satisfyingly -- successful. And, of course, there are unpleasant moments. Then, as well, there is a bittersweet side, says Siegel.

While she's excited about joining Breen in his quest to create a lean-and-mean and more focused profile for the company he'll be leading, she admits that the venture "produces mixed emotions looking to a day when we aren't part of the same company. We are a team that enjoys working together and, ultimately, we are going to be part of separate corporations."

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