Environment, Health & Safety Acquisition Integration by David Knight Myers A Report Submitted for Course “Studies in EH&S” Major Subject: Environment, Health & Safety Approved: Ernesto Guiterrez-Miravete, Adviser Rensselaer Polytechnic Institute Hartford, Connecticut August, 2013 (For Graduation April, 2015) ABSTRACT The intent of this paper is to show the process of how a corporation integrates its environment, health, and safety management system at a company that it has acquired. Every corporation does the acquisition integration different, but there are important stages that every corporation must follow to properly integrate the new company into it’s EH&S management system. In this paper I will explain this process in detail, and also show how companies have excelled and failed at EH&S integration using historical case studies. 2 Table of Contents 1. Introduction…………………………………………………………………………...pg.4 2. Due Diligence Phase 1…..…………………………………………………………pgs.4-6 3. Due Diligence Phase 2……………………………………………………………pgs. 6-8 4. Due Diligence Case Studies a) UTC Fire & Security……………………………………………………….pgs. 8-9 b) Shore Realty…………………………………………………………….. pgs. 10-11 5. Integration………………………………………………………………………pgs. 11-12 4 Phases of Integration a) Preparation……………………………………………………………….pgs. 12-13 b) Cooperation………………………………………………………………pgs. 13-14 c) Integration……………………………………………………………………pg. 14 d) Implementation…………………………………………………………...pgs. 14-15 6. Integration Program Examples a) 3M Corporation………………………………………………………….pgs. 15-16 b) General Electric……………………………………………………………...pg. 17 c) Pratt & Whitney…………………………………………………………..pgs. 17-23 7. Future of EH&S Integration……………………………………………………pgs. 23-24 8. Conclusion…………………………………………………………………………..pg. 24 9. Bibliography………………………………………………………………………...pg. 25 3 1. Introduction Corporations that are looking to expand their businesses and grow their portfolio by acquiring existing smaller companies face many challenges. There are so many aspects that corporations must take into account like human resources, union contracts, finance, and information technology systems. Other challenges that companies don’t consider are the environment, health, and safety issues that come with acquiring a new business. This is especially tough for corporations that have very mature EH&S management systems. The newly acquired companies do not have an equivalent EH&S management system and don’t even meet their local compliance standards. American companies that acquire international sites struggle with this due to the mature regulatory environment. In many cases, the regulatory requirements at these locations are minimal and they may not have an EH&S staff person available or have the expertise to bring the site up to compliance. EH&S acquisition integration is what my project will be focused on. Through the use of case studies I will show how it is done successfully and pitfalls to avoid. I will also show how large corporations manage the EH&S acquisition process, and also share my EH&S integration process know how and lessons learned over the time that I have had my current position at Pratt & Whitney. The overall process starts with the due diligence of the company that is being acquired, and then the integration phase starts once the due diligence portion of the acquisition is closed out. 2. Due Diligence Phase 1 The first thing that a corporation must do before it acquires a new company is follow a due diligence process. The first step is called a phase 1 report that looks at a high level of 4 environmental & health/ safety issues that the company has at their site or various sites depending on the acquisition. The analysis, often called a Phase I ESA, typically addresses both the underlying land as well as physical improvements to the property; however, techniques applied in a Phase I ESA never include actual collection of physical samples or chemical analyses of any kind. The due diligence process is usually done by both a corporation representative and an outside contractor that completes the technical aspects of the due diligence process. The reason that the phase 1 assessment is done by a consultant is due to the complexity of the report and the skills that are necessary to complete all aspects. This is such a common report now that the ASTM has a specific standard on a phase 1 assessment, and who can do one. “Under ASTM E 1527-05 parameters were set forth as to who is qualified to perform Phase 1 ESA’s. The new parameter defined an Environmental Professional as someone with 1) a current Professional Engineer’s or Professional Geologists license or registration from a state or U .S. territory with 3 years equivalent full-time experience; 2) have a Baccalaureate or higher degree from an accredited institution of higher education in a discipline of engineering or science and 5 years equivalent experience; or 3) have the equivalent of 10 years full-time experience.”1 This is laid out in two separate reports that the contracted company puts together. That phase 1 report consists of: Depending upon precise protocols utilized, there are a number of variations in the scope of a Phase I study. The tasks listed here are extremely common to almost all Phase I ESAs: 1 Performance of an on-site visit to view present conditions (chemical spill residue, dieback of vegetation, etc) hazardous substances or petroleum products usage (presence of Wiki-Phase1 5 above ground or underground storage tanks, storage of acids, etc.); and evaluate any likely environmentally hazardous site history. Evaluation of risks of neighboring properties upon the subject property. Interview of persons knowledgeable regarding the property history (past owners, present owner, key site manager, present tenants, neighbors). Examine municipal or county planning files to check prior land usage and permits granted Conduct file searches with public agencies (State water board, fire department, county health department, etc) having oversight relative to water quality and soil contamination issues. Examine historic aerial photography of the vicinity. Examine current USGS maps to scrutinize drainage patterns and topography. Examine chain-of-title for Environmental Liens and/or Activity and Land Use Limitations (AULs).2 3. Due Diligence Phase 2 Phase 2 Environmental Site Assessment reports are sometimes required when a Recognized Environmental Condition (REC) is found during the Phase 1 Environmental Assessment process. Phase 2 Environmental Assessments consist of collecting soil samples to screen for chemical or metal contamination. “This sampling is conducted by drill rig, hydraulic push, hand auger or backhoe, depending on site specific conditions. Phase 2 Environmental reports can also include sampling of groundwater and surface water. This testing is recommended when there is a significant potential for the existence of an environmental liability that can affect the value of a property. Environmental liabilities are costs associated with regulatory-mandated cleanup, 2 Wiki-Phase 1 6 disposal of regulated-waste, and civil liability. Civil liability occurs when the contamination has migrated offsite or tenants sue over exposure to hazardous materials.”3 This is a common question and there is not a simple answer. “The ASTM standard describes a recognized environmental condition as the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release of any hazardous substances or petroleum products into structures on the property or into the ground, ground water, or surface water of the property.”4 The term includes hazardous substances or petroleum products even under conditions in compliance with laws. In general, previous uses that can typically create the need for a Phase 2 Environmental Study include: gas stations, dry cleaners, machine shops, manufacturing, hazardous waste storage, etc. Further analysis into the specific site details during the Phase 1 Environmental process will determine, if any of these previous uses have created a significant potential for a release or if a known release has occurred. Expertise in soil and groundwater contamination is required in order to make good judgments in regards to these matters. Many corporations will automatically require a Phase 2 Environmental investigation for a property that has had any of these environmentally-sensitive uses. These studies can range from Limited Phase II Environmental Assessments to full Phase II Environmental Studies, which include installation of groundwater monitoring wells with extensive testing. “As part of the due diligence process for real estate transactions, a more limited study should be conducted as a screen initially to 3 4 Phase 2 Environmental Phase 2 Environmental 7 determine if there is a severe problem. If this is the case, further site characterization may be required or this can help the buyer decide if he wants to go forward with the transaction.”5 A phase 2 is usually done if the acquiring corporation sees some liability issue with the phase 1 report. The phase 2 report will focus on those liability issues from the phase 1 report. Once the phase 2 is completed the acquiring corporation will review and decide on any conditions that they would like to put on the deal. This is usually done with reserves that are set aside for future liabilities that may present themselves after the deal is complete. If the lab results from the soil, water or groundwater samples indicate a significant problem, need further delineation or if cleanup is required by an agency or by the responsible party, a site characterization, risk assessment or remediation may be required. The remediation or cleanup typically has to occur until verification samples are less than federal, state or local cleanup standards. In some cases the owner or occupant wants to completely remove all contaminants to non-detectable, if it is feasible. 4. Due Diligence Case Studies UTC Fire & Security - One case of integration due diligence process done well is UTC Fire & Security. “UTC first entered this segment in July, 2003 with the acquisition of Chubb, a world leader in security and fire prevention services. In April 2005, UTC acquired Kidde Plc., a leader in fire detection and suppression, and joined with Chubb to form UTC Fire & Security, now the number two player in the global fire and security industry. After more than 60 acquisitions in 35 5 Phase 2 Environmental 8 countries through 2010, UTCFS is providing services to over 1 million customers, with approximately 46,000 employees.”6 What UTC fire security focused on first was to get a sense of compliance of the new acquisitions. In 2010 UTC acquired GE security and within 3 weeks had completed the compliance audits, and environmental permit assessments for 25 sites. This was a very complicated process due to the number of acquired sites, but also the number of people and departments that were involves in the acquisition. “This accomplishment was the result of cooperation between multiple business functions. The team recognized the immediate contact with and attention to GE businesses would facilitate the integration of the company into all business processes concurrently.”7 UTCFS did a very important thing and involved executive level management and formed an acquisition integration team that involved all aspects of the company. “World headquarters senior management visited specific locations the day of the announcement to welcome the GE security employees and present the vision of UTCFS, including our EHS culture.”8 The acquisition did not always go smoothly and there was one site in particular that had some extensive environmental contamination. UTCFS did the right thing and cleaned the site up even though they did not contribute to the environmental contamination. Kidde had a site in West Virginia that had extensive environmental contamination. UTC decided to decommission the site using their own funds and give the land back to the town so that they could develop it for community uses. UTC even gave a grant to the town for the construction costs. 6 UTC Fire and Security 7-8 UTC Fire and Security 7-8 8 UTC Fire and Security 7-8 7 9 Shore Realty - A good example of a poor due diligence process is the famous New York circuit court case of New York v. Shore Realty Corporation. Shore realty was a small real estate company that purchased a 3.2 acre property for condominium development. There was a phase 1 assessment done on the property that came up with some significant environmental risk, but Shore Realty management decided to ignore the risk. “Five large tanks in a field in the center of the site hold most of some 700,000 gallons of hazardous chemicals located there, though there are six smaller tanks both above and below ground containing hazardous waste, as well as some empty tanks on the property.”9 The management of Shore Realty felt that they could not be held responsible for the cleanup of the hazardous waste since Shore Realty did not generate or produce the hazardous chemicals and waste on the property. “at the time of acquisition Shore Realty knew of that hazardous waste that was stored on the site and that cleanup would be expensive, though neither Shore or management had participated in the transportation of the nearly 700,000 gallons of hazardous waste now on the premises.”10 This is the case that is precedent for the national CERCLA law. This law authorizes the federal government to clean up Superfund sites using federal money, but go after responsible parties for reimbursement, or issue an injunction in federal district court to force a responsible party to clean up any site or spill that presents a danger to the public welfare or environment. Shore Realty failed to realize its responsibility when it bought the property knowing that there were significant environmental hazards on the property. The management and environmental experts at Shore Realty should have realized that it was too big of a risk to acquire the property and passed on it. “In October 9 Percival 402-405 Percival 402-405 10 10 1984, the district court held Shore Liable under CERCLA for the state’s response costs and issues an injunction under the state nuisance law directing Shore and management remove the remaining hazardous waste stored on the property.”11 5. Integration Once the acquisition of the company is agreed upon the deal is done and the hard work of integration begins. One of the issues with the due diligence process is confidentiality and not all the right players are usually involved with the decision making process. This is done at the executive and legal levels. All the executives and lawyers are going on are the phase 1 & 2 reports, and the advice of the EH&S Vice president. Executives have a 30,000 foot level view of the acquisition, and can’t see the real EH&S issues of the acquisition as a trained day to day EH&S professional can do by spending time with the acquisition leadership and local EH&S professionals. Usually the decision to acquire the new business is made for financial reasons unless strikingly large environmental or safety issues emerge from the reports. This is where the EH&S compliance manager or EH&S acquisition integration manager gets involved and starts the internal process of EH&S acquisition integration with the new company. The first area that the integration process will focus on is compliance. The new company will undergo a compliance audit at the newly acquired site or sites. This can be a complicated process depending on the acquisition because of the different country laws and regulations that need to be considered during the compliance audit process. This is either done by the compliance department of the acquiring company if they have experience in the area or they will have a 11 Percival 402-405 11 contractor in the area do it so that there is some expertise in the compliance audit. Once the compliance issues are identified a corrective action plan is put together to address all findings with timelines and owners attached to each. This is usually the main focus during the first 6 months of the integration. Along with the compliance audit the EH&S integration manager will have a meeting with the newly acquired company management and outline the EH&S management system and expectations of the corporation. There is also a training plan that is put together for the different levels of management within the company to bring them up to speed on the EH&S management system. This needs to be done in small doses as to not overwhelm the new management of all the requirements, goals, and expectations that come with the EH&S management system. This is also a good time for the integration manager to see how committed the management team is to implementing the new EH&S management system and correcting the compliance issues that are found during the compliance audit. If commitment is not apparent a mature corporation will see to change the management team to one that is committed. Once the compliance corrective action plan is completed the integration site has to implement the acquiring corporation’s EH&S management system. The first thing to do is to develop an implementation plan using the acquiring companies EH&S protocols. There are four stages of integration that the acquired company EH&S staff goes through. The four stages are preparation, cooperation, integration, and implementation. These will now be discussed in turn. a) Preparation – If the EH&S professional have been keeping up with his or her work and doing it properly this is the easiest step. The EH&S professional has already been filling out report, permits, and keeping up with the EH&S programs at the site on a day to day 12 basis. Once you are notified that your company is to be acquired by a larger corporation you will need to do some additional preparation. “First, remind your manager of the issues you see as the most significant. Is a wastewater treatment plant overloaded? Have you still not tested the underground tanks? Has some groundwater cleanup been inactive for the past 5 years due to budget problems? Is there something you suspect that you have not been able to investigate? The buyer’s representative will find out anyway. Now is the time for you to be cooperative.”12 b) Cooperation – This stage is very important because the EH&S professional of the site will be building a relationship with the acquiring corporation’s EH&S representatives. This is also the stage that the acquiring EH&S staff will be reviewing all kinds of EH&S information at the site. “Every aspect of what you do now or have done will be scrutinized. Why? The intent of the party considering the purchase of your company is to identify any material liabilities associated with environmental, health, and safety issues. Advisors to the buyer (and frequently also for the seller) review existing information and conduct interviews and site visits to identify potential liabilities.”13 Another thing to consider is the confidentiality of the deal especially if the acquiring company is public. The local EH&S manager is expected not to share any information with any unauthorized employees or media. Sharing information could be a deal breaker. It is also important to transfer information in a timely manner. “Do not become the 12 Montrone, Shelly, and Obbagy 1-6 13 Montrone, Shelly, and Obbagy 1-6 13 choke point for the transfer of information. During the process, responding to the needs of the deal is probably your most important job. Your standard responsibilities may need to be given a lower priority.”14 c) Integration – Once the deal is complete the local EH&S professional has to concentrate on integrating the existing business into the new acquiring company. This is not easy due to the acquiring company usually looking at cost reduction. “The deal has been predicated on expectations of reduced costs, increased efficiencies, and the better bottom line. You have to quickly deliver your contribution to making this work.”15 This is also where the local EH&S professional gets to know the EH&S culture of the acquiring corporation and how supportive the management is of the EH&S management system and the EH&S initiatives that the site has. This is a tricky time due to the acquiring corporation may not be as supportive as the former company and the local EH&S professional may have to consider finding another corporation to work for. “The level of management commitment to environmental policies will allow you to set priorities for carrying out your responsibilities to the new organization. Identify the systems that avoid noncompliance is the way for the new organization to establish accountability for environmental results.”16 d) Implementation – This is the last stage of the acquisition process. Once you have completed the first 3 steps there is the implementation stage where you implement the 14 Montrone, Shelly, and Obbagy 1-6 15 Montrone, Shelly, and Obbagy 1-6 16 Montrone, Shelly, and Obbagy 1-6 14 new company’s EH&S management system. “Managing EHS risks and opportunities in the new company is no doubt a daunting task. The new company has a different array of stakeholders, risks, and challenges.”17 There is also new assessments using the new company’s tools and learning what the new management wants to see from the EH&S professional or manager. 6. Integration Program Examples a) 3M - There is no standard way that each corporation integrates their new acquisitions in their EH&S management system. There are several similarities though. 3M is a large chemical corporation that has been following the same integration for every acquisition that they have acquired since 2010. The roadmap can be summarized using the following building blocks (See Figure 1): 17 Montrone, Shelly, and Obbagy 1-6 15 Figure 1 Yeo 4-5 3M Acquisition Integration Roadmap The 3M acquisition policy states that the integration process is complete by fulfilling these specific criteria from the integration plan: All applicable facility scorecard items have been activated Initial assessment completed and documented into 3M database. All high risk items have been closed out in 3M database. EH&S integration roadmap developed, implemented, and completed EH&S integration team agrees with closure.18 3M also develops an integration lead and team for each acquisition. There is not a corporate integration manager that oversees the process. 3M wants the process to be flexible and based on risk and compliance. Every EH&S acquisition lead responsibilities are: 18 Serve as interface between EH&S and site Lead initial EHS assessment Lead development for the EHS roadmap Serve as contact for functional leaders Coach and track integration progress Yeo 4-5 16 Update project status quarterly19 b) General Electric does integration a bit different. The EHS group focuses mainly on compliance from the beginning of the acquisition. “Compliance and understanding EHS risk is very much on our minds from the first look at a proposed deal. As soon as a potential acquisition is identified the EHS team begins researching publicly available information and analyzing any information that is available on the quality of programs, regulatory history and physical site conditions. If there are no materially concerning issues at this stage, a memorandum is signed or the transaction moves to the next stage, and the EHS team broadens its scope and begins a more detailed evaluation”.20 Another difference of the GE acquisition program is the lack of defined timeline like the one that is addressed in the 3M. Instead they focus on the first 6 months of the acquisition, but fail to define when an acquisition is released from the integration process. “In addition to addressing deficiencies, the EHS integration process kick into full swing during the first six months after GE takes ownership. From daily pulse meetings to fast track plant and services training, GE’s EHS leadership team moves quickly to define expectations. On-site action plans are created, schedules and timelines are determined, audits are conducted and needs assessments confirmed.”21 c) Pratt & Whitney - I am the acquisition integration program manager for Pratt & Whitney so I will be going through the integration process in detail. I inherited a broken process two years ago. The first thing I did was hold a value stream mapping event with all the stakeholders from 19 Yeo 4-5 Jones 21 Jones 20 17 Pratt & Whitney’s major business units. This was a weeklong event that focused on the timeline of the acquisition process (See Figure 2) and where to improve upon the timeline to make it a better process for the customer and Global EH&S. The integration acquisition process is a two year mandate per United Technologies EH&S Standard Practice 2. The value stream mapping team did not change the timeline, but made it more efficient from the beginning of the process. The team broke down the process into key steps and looked at how long each step took, and how much wait time is between each step. This is represented in figure 2 as the time line below the process. The lower portions of the time line is process time, and the higher portions between are the wait times. 18 EHS INTEGRATION VSM EVENT Current State Analysis 1 1 3 1 1 1 1 2 3 •Eliminate Waste and Turnbacks by managing the value stream inputs effectively •Utilize the existing Assurance Review Process for audit alignment and reduced variation •Targeted training to ensure sustainability and accelerate process flow Figure 2 – Pratt & Whitney Value Stream Mapping 2 2 19 2 2 17 EHS INTEGRATION VSM EVENT Future State Map Year 1 Year 2 L/T = 454 – 697 days C/T = 233 – 385 days T/T = 730 days 18 Figure 3 – Pratt & Whitney Value Stream Mapping 20 Figure4 –4 Pratt – Pratt & Whitney Value Stream Figure & Whitney Integration Timeline Mapping 21 Once the current state was put together the team looked at how the future state would look like. The future state in figure 3 shows: Reduced variation and increased output by managing value stream inputs Standardized integration capacity analysis and targeted training ensures compliance and sustainability Utilization of the current assurance review process ensure alignment and decreases variation within standard work Decrease Lead time from >800 days to < 697 days. Once the team had the future state complete we focused on tools to help the acquisition site in the integration process. There were three areas that the team focused on. The first area was an EH&S integration form that helped manage the integration effectively from the very beginning and the expectations that were set on the leading business unit and the Global EH&S organization. The form is managed by the operating business unit integration lead and the Global EH&S integration manager. The form documents who is on the integration team from all aspects of the integration, training expectations and who is responsible for giving the training, compliance and management system audit tentative dates, and areas that the operating business would like Global EH&S organization to assist with during the integration. The second area that the team focused on was aligning the acquisition integration final audit with the company compliance assurance standard work. Every 4 years all UTC operations receives an EH&S management system audit that includes regulatory compliance and company requirements that is called the compliance assurance audit. This is a well defined process that the team wanted to use for the audit process for integration. So the team updated the integration procedure PW 22 SLP 22.2 to align with the compliance assurance with a passing graduation score of greater than 70 percent. The third area that the team focused on was training tools for the acquisition site, and a timeline on when and what training should be given at the site. The team wanted to be careful not to overwhelm the acquisition with all the requirements of the EH&S management system. The fist training tool that was developed was a short PowerPoint presentation that would be given to the acquisition management on the overall EH&S management and the compliance expectations of Pratt & Whitney. The second training tool that was developed was a checklist of all the Pratt & Whitney training requirements and who should be taking the different training classes and when the population should be taking the training during the integration process. The last tool that was completed was a new EH&S professional orientation that is 3 days duration for the new EH&S staff that is very detailed on the Pratt & Whitney requirements, IT systems, and EH&S goals. You can see the entire 2 year acquisition integration timeline. This subway chart gives you a visual representation of the acquisition integration process using 3 separate legs. The top leg is about regulatory compliance of the acquisition. The middle leg is focused on when an acquisition should be reporting different site information to the corporate EH&S dept. These reports are environmental & safety goals that the acquisition site is working towards. The bottom track is about implementing the UTC and Pratt & Whitney EH&S management system. (See Figure 4) 7. Future of EH&S Integration The last piece of the project is what does the future hold for acquisition integration. I feel that companies are going to be even more detailed in their approach before they acquire a company in 23 the future. There is a big emphasis now on sustainability and how a company’s image is viewed by the public. “Typically, tools such as life cycle analysis, value chain analysis, or stakeholder needs assessment are used to identify emerging risks such as those related to resource consumption (land, water, biotic, energy), human health, product safety, or waste. Once you have identified these risks, you must assess their relevance to the company. Will they impact raw materials acquisition, manufacturing, distribution, or sales and service, or end of life decisions?”22 Large corporations are going to want to see that the companies they are acquiring have sustainable products, or the ability to be sustainable with a return on investment for the acquiring corporation. They are going to want to see life cycle assessments on the products that they are going to support, and that the company culture is there to foster sustainable facilities, suppliers, and workforce. 8. Conclusion In conclusion the EH&S integration process is vital to every large corporation in today’s atmosphere of large corporate acquisitions and takeovers. I have shown in this paper that there are several ways to incorporate companies into a new EH&S management system, but there are definitely some specific steps that must be followed for all acquisitions. I feel that the process of due diligence, compliance, management system, and training is vital to follow for any large company to have a successful integration acquisition process. 22 Montrone, Shelly, and Obbagy 1-6 24 Bibliography Percival, Robert. Environmental Regulation Law, Science, and Policy. 6th. New York: Aspen, 2009. 402-405. Print. UTC Fire and Security, . "Shared EH&S Responsibility, Shared Success." Campbell Institute - A transformative Force in EH&S. 2012: 7-8. Web. 23 Jul. 2013. <www.thecampbellinstitute.org>. Montrone, Anthony, Dennis Shelly, and Jane Obbagy. "Merger Survival Guide for EHS." BLR. (2004): 1-6. Web. Yeo, Henry. "3M Acquisistion and Integration Programme." APAC Environment Health & Safety - Focus. 2012: 4-5. Web. 23 Jul. 2013. Jones , Harold. "Leading Successful Acquuisistions Our People: Health & Safety/Employee Perspectives." GE Aviation Lean Six Sigma & Environment, Health and Safety. General Electric, n. d. Web. 14 Jul. 2013. <http://citizenship.geblogs.com/leading-successful-acquisistions/>. "Phase 2 Environmental." . All Appropriate Inquiries Environmental Corporation, n.d. Web. 23 Jul 2013. <http://www.aaienvcorp.com/phaseii.html>. “Phase 1 Environmental Site Assessment” Wikipedia: The Free Encyclopedia, Web July 5th, 2013. <http://en.wikipedia.org/wiki/Phase_I_environmental_site_assessment> 25