With slow growth characterising much of the world economy, businesses are wondering how to maintain and improve share value. One strategy is to merge or acquire another business, which presents procurement with an opportunity to add value in several ways. Angus Craig explains.
What challenges will you face if your organisation is directly involved in a merger or acquisition?
The challenges can be split into three main areas. By acquiring another organisation, you acquire their supply base. The first challenge will be to get visibility of the spend and make a comparison with your existing spend. Just bolting B’s spend on to A’s spend sounds easy, but it isn’t because suppliers will argue that differences in specifications make harmonisation impossible. The number of stakeholders will increase and their expectations of procurement are likely to be different. It is better to meet the stakeholders within the first weeks and ensure that expectations are set at an achievable level. Finally, there are going to be variations in financial controls. This may mean, for example, that there is less control over spend, which may undermine procurement’s hard won position.
What happens if one of your suppliers is acquired?
It depends on why the business was acquired. Broadly speaking, there are two reasons to acquire a company. The most common is to boost the acquiring company’s performance, either by helping to improve its market position or to cut costs. In this situation, the supplier may seek to increase margins by increasing the prices of existing products. It may also try to cross-sell new products to increase revenue. Finally, if existing products have low margins or have been superseded by another product then it may be discontinued. In most cases, this presents unwelcome challenges for procurement. The second, less familiar reason to acquire a company is to reinvent the business model and thereby fundamentally redirect the company. The long term objective of the supplier is to disrupt the market. If this is the case, then this presents procurement with the opportunity to re-evaluate existing relationships and influence product development.
Which sectors are most likely to be affected by mergers and acquisitions?
The financial press contains a lot of speculation about mergers and acquisitions (M&As). This is usually fuelled by a company reporting poor financial results and thereby becoming an acquisition target. Although worldwide M&A activity was high at the start of 2011, it has dropped off steadily. This is due to economic uncertainty – specifically, Europe’s debt crisis and doubts about the US economy. That is not to say that there is nothing happening. Significant activity is expected in the energy, mining and utilities sectors due to demand from China and India and the imminent de-regulation in the European market. Technology, media and telecommunications is also likely to have activity due to strong balance sheets, the allure of emerging markets and the prospect of synergies in developed markets.
How do you know when a company is going to be acquired?
There is no legal way to know – if you did, it would be a case of insider trading, which is a criminal offence. There are, however, a number of early warning signs to look out for. First, listen to the rumours and read the press. Even if the rumours are denied by management – which they have to be for legal reasons – they should be considered in conjunction with other evidence.
Second, look out for the ‘weak’ signs: the unavailability of senior executives at meetings where you would expect them to appear (because people have been pulled out to work on the deal); the introduction of new executives with unclear roles (who want to assess potential opportunities); requests for information about the relationship with your suppliers and your plans for the future (the bidding company may be doing due diligence on your company); fewer corporate announcements from the PR and Investor Relations teams (as they may be concerned about saying anything that would affect the planned deal); and finally, delays in product launches, due to management distraction or a desire to delay the launch until after the deal is announced; or the acceleration of product launches if management thinks this might increase the price they can get for the company. Of course, the announcement of an acquisition may come as a surprise to everyone. This is likely to be true especially if the deal is hostile.
What are the opportunities
for procurement when their company merges?
Procurement is ideally placed to capitalise on the opportunities a merger offers. Procured goods and services make up the highest proportion of an organisation’s cost base (60% on average). Although there may be some long term agreements with suppliers, the majority can be terminated relatively easily. If procurement
can move quickly, significant
savings can be delivered.
- Most procurement functions start by benchmarking their prices. This is a rare opportunity to work in an environment where there is full disclosure. As mentioned earlier, harmonising prices is not straightforward so sufficient time and resources must be allocated. Although it is generally assumed the acquiring organisation is bigger and therefore has better prices, this is not always the case so take the time to evaluate existing agreements. Once prices are benchmarked, the savings opportunities should be prioritised, not only in financial terms, but also in terms of ease of implementation. It is no good having a single opportunity that is going to take a whole procurement team to deliver. Ideally, some quick wins should be identified to provide time for the more difficult categories to be worked on.
- Once an opportunity has been identified, procurement must then gain control over spend. Ideally, this will involve getting buy-in from stakeholders. If the deal is hostile, their financial authority may be removed. It is widely recognised that the most effective way of driving compliance is rolling out a single procurement system. Some organisations view this as an unnecessary expense. However, poor visibility of spend will persist if procurement has to build up a picture based on two or more systems. Bear in mind that the long term cost of supporting two or more systems will eventually outweigh the short term cost of moving to a single system.
- Where necessary, current agreements should be novated to the new company. The amount of work required to novate agreements is dependent on the maturity of the acquired organisation’s procurement function. If the procurement organisation is immature, it is unlikely there will be many agreements or that they contain many beneficial terms.
- Finally, communication to internal stakeholders and suppliers should be considered. Regular updates to stakeholders help keep them on side. If supplier data is poor, communication with suppliers may be difficult. In this case consider the importance of supply.
If a manageable number of critical suppliers are identified then procurement can ensure that key messages are received and understood.
Benchmarking prices, getting control over spend, novating agreements and managing communications require a high level of co-ordination so it is advisable to nominate an individual to lead the activity.
What are the threats for procurement if one of their suppliers is acquired?
The threats depend largely on the strength of procurement’s relationship with the supplier. If a supplier is dependent on the procurement’s organisation, then changes such as discontinuation of products may take some time to allow all parties to make necessary adjustments. If the supplier is not dependent or is facing significant financial challenges, then changes are likely to be swift and require minimum communication. This is a time when all parties are re-evaluating their relationships so caveat emptor is more important than ever.
☛ Angus Craig is a director of Craig Hall Consulting, which specialises in procurement transformation.
