How to select and retain talent during carve-outs

As divestitures become an important strategic tool in business transformation, many CEOs are having to decide which talent goes with the carve-out and which talent stays with the parent company. Poor decisions here have the potential to negatively affect both companies.

Leaders should first consider the following:

  • Will the carve-out (what we call “CarveCo”) have the talent it needs to enable success? If too many employees leave the carve-out after the deal, then the return on the buyer’s investment could plummet, possibly creating legal and financial liabilities for both buyer and seller. If the seller retains too many employees, then it could be left with "stranded costs," meaning it may not have enough work to support remaining employees. A bad carve-out could also damage the seller’s reputation in the market, possibly making future deals more difficult and time-consuming.
  • Will the parent company (what we call “RemainCo”) retain the talent it needs to move forward? Divestitures often are the first step in a transformation designed to help a company stay relevant and thrive. Corporate leaders should confirm they’re not sabotaging their transformation efforts by leaving the parent company understaffed or underskilled.
  • Will employees continue to trust leadership or will carve-out staffing decisions alienate them? In addition to talent related decisions, corporate leaders should also remember that employee trust is crucial during a transformation. Employees should be informed that leadership is considering their concerns when making staffing decisions.

There is no magic formula that tells leaders how to allocate staff handling shared functions between the carve-out and the parent company, and certainly no guarantee that everyone will be happy with the results. But PwC has identified key actions that leaders can take throughout the deal process to help enable better employment decisions and confirm employees’ voices are heard.

Selection and retention decisions

During a carve-out, the transactional goals include identifying which employees will transition to the buyer, confirming they do transition, and meeting the obligations in the purchase agreement. In addition, the parties to the deal should also be focused on delivering employee offers, reducing transaction costs, confirming business continuity for the parent company and balancing the parent company’s severance liability.

Throughout the deal, buyers and sellers have different — but equally important — responsibilities.

Seller’s responsibilities:

  • Develop standalone model to give a buyer a range of possibilities for what staffing level might need to look like 
  • Determine which employees are partially allocated to “CarveCo” and may potentially need to be included in the perimeter
  • Define the employee perimeter — the headcount that will transfer from the seller to the buyer — during due diligence and recommend the operating model to the buyer
  • Notify transferring employees and offer them retention as needed
  • Monitor business as usual changes including attrition and new hires
  • Provide detailed perimeter management and regular data refreshes to buyer and key stakeholders

Buyer’s responsibilities:

  • Review the standalone model to inform staffing needs, position on Transition Services Agreement (TSA) scope, duration and future organization
  • Confirm smooth transition and onboarding experience for employees
  • Define the future organization, leveraging the sign-to-close and TSA periods to plug any gaps or remove redundancies

How to help enable selection and retention decisions

The seller’s first step is to determine who has been working in the business unit being carved out. For many roles and functions in the carve-out, it may be obvious: there are employees who are 100% devoted to that particular business unit.

But there may also be employees who work in shared functions, such as human resources, information technology, finance or accounting, whose time is allocated between the carve-out and the parent company.

To assess which of those employees should go with the carve-out may be more challenging.

Here are some factors to consider.

  • How critical is that role for the carve-out’s standalone operation? Leaders can rank role criticality by low/medium/high to answer this question.
  • Is the role in question involved in the transfer of the carve-out from seller to buyer?
  • How physically close to the carve-out’s facilities does the individual live?
  • Does the employee have a preference in where they end up?

In some cases, surveys can be a valuable tool in understanding how employees are feeling about a pending transaction and their preferences. Surveys may also communicate that leaders are listening to them, which can be valuable in maintaining employee engagement and trust.

Communicating employment decisions

During the inherent uncertainty of a carve-out, it’s important to keep employees informed — and to understand how they’re feeling about the transaction. As highlighted in a recent PwC blog on trust in deals, most companies will say that employees are one of their greatest assets. But trust can be eroded during dealmaking not only by the choices that are made but also the way they are communicated — from the inclusion and exclusion of certain stakeholders to the timing and depth of transparency. Retaining and enhancing the trust between employees and leaders is often a core part of M&A value creation.

Employee communications, such as newsletters, videos, small group meetings and town halls can help staff understand what’s happening, what the timeline is, the rationale behind a carve-out decision and what their future jobs could look like.

Throughout the process, both seller and buyer may also consider sharing information about the buyer’s diversity, equity and inclusion (DEI) policies. PwC research shows that women and racially/ethnically diverse employees are more likely to trust their leaders when they have positive perceptions of their employer’s DEI practices.

Surveys, focus groups and other ways of obtaining feedback can help leaders understand employee sentiments and take steps to keep morale high. For instance:

  • Are “CarveCo” employees excited about the transaction? Do they have any concerns that the seller could take to the buyer and confirm they are resolved ahead of time?
  • What is the employee sentiment of “RemainCo”? Do they have a clear understanding of the vision of the future organization and where they may fit in?

Performance recognition programs at “RemainCo” can help engage and retain employees. For selected groups, stay bonuses, market-aligned pay and ready-to-go counter-offers can help reduce attrition. At the same time, the parent company may want to retain search firms, step up hiring activities and offer employees referral bonuses to help attract more candidates to fill jobs that open up.

During all of this, sellers should keep in mind the interests of the buyer. And they should consider what employee information they can appropriately transfer to the buyer.

The owner of the carve-out is likely to want information about compensation for critical positions, and may want some confirmation that when the transaction occurs the carve-out won’t be missing critical positions because key employees have left outright or stayed with the parent company.

Given the importance of key talent for the success of carve-out transactions as well as go-forward strategy for the seller, having a plan for selecting and retaining talent is critical. While final stay/go decisions are unique for every deal and every employee, a well thought out process, implemented early and with the backing of senior leaders, can make or break a deal.

Banking on talent

A large bank divested more than two-thirds of its regional banking business as part of a carve-out transaction. Retaining key talent — and filling roles that opened up due to people leaving — were critical for the success of the divestiture.

Leaders had a clear vision of which people they wanted to stay with the divested regional bank business and which people they wanted to retain in the parent company as they reorganized the overall corporate structure.

Although leaders identified the talent they wanted to remain with the carve-out, the high level of uncertainty for employees decreased their sense of job security. As a result, there were high levels of turnover and attrition.

To address this talent drain, the bank adopted a strategy of overcommunicating. This included:

  • Regular focus groups and surveys to gauge employee sentiment
  • Newsletters and other communications to help keep employees informed

The bank also rolled out a program of incentives and increased recruiting. That included:

  • Hiring a search firm to fill vacant positions more quickly
  • Creating employee referral campaigns for critical functions
  • Retention bonuses for both the bank and the carve-out company
  • Internal promotions to encourage employees to stay with the parent company
  • Performance bonuses
  • Additional incentives, such as counter offers, stay bonuses and more competitive pay for certain employees

In the end, the parent company and the regional business were able to come through the transaction with a strong workforce in place that met each of their respective needs while confirming that critical talent was retained throughout the process.

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Vivek Narayanan

Partner, Deals, PwC US


Jennifer Farkas

Deals Partner, PwC US


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