PARTICIPANTS
Larry Beard is director of purchasing at Severn Trent Water, a UK utility company based in the Midlands
Luisella Chiesa is a vice-president at Efficio, a European procurement consultancy and the sponsor of this debate
Pierre Jagnoux is vice-president, global sourcing, at Alstom Transport, a French train manufacturing and maintenance company
Geraint John is editor-in-chief of CPO Agenda and chaired the discussion
Tim Jones is director of supplies strategy and development at Corus Group, a big Anglo-Dutch steel maker bought by Tata Steel in April 2007
Lars Mastrup is senior director, group procurement, at Danfoss, a family-owned Danish company making refrigeration, air conditioning, heating and motion control equipment
Robert van Motman is senior director, global sourcing Europe, at the pharmaceutical giant, Pfizer, based in the Netherlands
Erik Verholen is new venture integration manager at Philips, the Dutch electronics group, working in its general purchasing indirect spend shared services centre
Johan Wiegman is director, supply and sourcing, Market Unit Northern Europe, at Ericsson, the Swedish telecommunications firm
The debate took place during the ProcureCon 2007 event. Our thanks to Diane Mekie and Chanelle Hingston at organiser Worldwide Business Research for all their help
Geraint John (GJ): What has been your experience in mergers and acquisitions? Have procurement opportunities been mainly about cost savings?
Larry Beard (LB): During the 1990s I worked for BTR, a conglomerate with 1,500 businesses around the world. It was acquiring a business a week at one point – companies such as Dunlop, Hawker Siddeley and Slazenger. We had a strategic purchasing function and we latched on to the mergers and developed a 100-day process, which gave us some visibility. In terms of the savings figures that get mentioned, nine times out of 10 the purchasing function has not been involved in the development of those numbers. Most mergers I’ve been involved in have been finance driven, and you inherit a number that you are expected to deliver in a short space of time. I’m amazed, because we should be involved in the due diligence process.
Lars Mastrup (LM): We are mostly involved in the due diligence phase. I’ve personally been involved in the due diligence and integration of two companies so far. Danfoss is very active in M&A – last year we acquired 12 companies and this year we have already acquired eight. I think we could get the synergies in purchasing faster. That’s probably the biggest challenge that I see.
Johan Wiegman (JW): In the case of Ericsson, the synergies are not the driving reason for acquiring these companies. We are mostly interested in the portfolio that they have – an interesting product or product range. We are expanding our reach in mobile TV and IPTV and have been acquiring a number of companies, including some smaller ones and a very big one – Marconi. It has operations in Germany and that is part of my territory, so we had a lot of work to do to integrate it and we haven’t finished yet. We’ve been doing it for two years and it’s been a rough ride. M&A is something that happens to you – the decisions are made at a higher level – and you have to deal with it. Any sort of sourcing benefits and savings are more or less a byproduct. It’s definitely not the driving reason for us.
Robert van Motman (RM): The acquisition is done for strategic reasons. In a lot of cases in the pharmaceutical industry it’s to keep the pipeline filled. You have to look 10 years ahead. So if you predict that your pipeline will not produce enough revenue in 10 years’ time, then you seek partnerships or acquisition targets to fill the gaps and to make the business more predictable. The decision on a merger will be made by a handful of well-informed people, but the day after the announcement procurement gets involved and it’s key. At Pfizer it does get the chance to make a calculation that’s realistic. But that has to been done very quickly, because the CFO needs to make a quick statement in more detail than he did on day one when he announced the merger about what savings will be generated and what the shareholders can expect.
Pierre Jagnoux (PJ): We are involved from the beginning in the due diligence. That means that all the figures, in terms of cost savings and synergies, come from sourcing. We are pushed to raise the figures, obviously. But, like Ericsson, we are not acquiring companies to make synergies but to extend our portfolio or geographical area. When the integration begins – and we have one going on at the moment – we try to put in an integration team to manage it, not a headquarters team but a very operational team. In the past five years I’ve been involved in a merger or acquisition every year. Alstom wants to double its size in the train line service business, where I work, and probably 50 per cent of this growth will come from external acquisitions.
GJ: Does it really matter whether you are involved at the due diligence stage?
Luisella Chiesa (LC): I think it definitely matters to be involved. It’s very important during the due diligence phase that you are there to set and contribute to those numbers. In the past six years I have supported many companies going through the different steps of the M&A process, from due diligence, through acquisition, to getting the first savings. By delivering short-term savings it’s possible to build a case for wider procurement involvement, especially for private equity investors where cash plays a very important role. I don’t think it makes a substantial difference how you get involved at the beginning, but it’s very important that procurement is there at the forefront. By being the first function that can attempt integration in a less radical and painful way than some other functions, such as manufacturing, procurement also has the opportunity to step up and get a place at the decision-making table.
Erik Verholen (EV): If you are involved in the due diligence, you know which are your top contracts and where you can create value for shareholders and earn back the price you paid for the acquisition. When you look at Philips over the past two years, most of the companies we have bought are quite small. Savings are very important in terms of the opportunity for procurement, especially when you look at non-product-related (NPR) spend. This is the first area where you can harvest synergies, it doesn’t take a lot of implementation time. We organise NPR purchasing within Philips on a global basis with global contracts. So in most cases from day one you can start doing things, as long as you are involved and know what to do. We have been changing this process: last summer the new venture integration office was founded, because we realised that whereas we did a lot of good things, they could be done faster if we were involved in planning more. If you have a common supply base for, say, transport, from day one you can harvest savings. But if it takes you two months to do the scanning and planning that opportunity can be lost.
LM: If you are involved, you also get ownership for the numbers you have to deliver.
Tim Jones (TJ): From the perspective of an acquired company rather than an acquiring one, procurement was completely involved in the process. We were pretty well prepared in Corus with our portfolio of how we do things in procurement, because we knew this was coming. We were spending roughly £7.5 billion a year and half of that was in basic raw materials. That was the key to our strategic direction of joining with Tata Steel, in terms of securing upstream integration into our supply base. You never know quite how much you’re going to go for, in terms of savings, when you’re bought. However, you can make a fairly good guess.
GJ: Does there come a point when cost savings are less of a priority and there are other opportunities as well?
RM: Cost saving is mandatory, it has to be done. But to achieve those savings you have do a couple of things and there are opportunities here. For example, organisational redesign. You can form very professional process and category teams where you didn’t have the critical mass to do that before. You can achieve globalisation – global teams, regional teams, local teams. So there is much more opportunity to do a better job. But the main goal for my boss, the CPO – say, 30 per cent – is delivering those savings. The other 70 per cent includes objectives like enhancing relationships with other departments and establishing governance structures.
LC: Clearly, the key metric for procurement is savings. There are quick wins in the short run, but it’s not only about simply leveraging contracts and volume. By achieving the savings, you prove your value and you can use that opportunity to upgrade your role within the organisation, gain a different status and prove your value in M&A situations, which are becoming more frequent. This is the ticket you have to pay for to be able to reshape your organisation, to broaden the scope of what you are doing. So it is about savings, but for procurement that should be a means to an end – an opportunity to take up a role that in a normal situation would take much more discussion.
PJ: The acquisition process gives credibility to the sourcing function, because quick wins come from us during the integration process.
LB: I think it opens doors if you deliver and do it within the timescales. On the other hand, if you don’t deliver then there is a credibility issue and you can get tarnished quite badly. Sometimes you inherit supposed opportunities only to discover that they are actually liabilities. Then you are the bearer of bad news and you don’t get a pat on the back for that!
TJ: If the merger or acquisition is done in an atmosphere of openness and transparency, then it can be very positive. In preparing for what was going to happen to Corus, we took a close look at the operating model within our company. You find things that you haven’t perhaps visited recently, because you are preparing to face off with your new partner. Certainly in our case I think some revisiting has proved very valuable to us. Of course there are external expectations, especially from those who are financing this activity. The way we approached this with Tata was to define clearly waves of activity and what the world could expect to hear from us during these waves. We separated out cash savings – $450 million P&L synergies by the end of 2009. That’s the first wave, but there’s also a second and third wave of management integration, cultural integration, and so on.
GJ: What are the main challenges that you’ve encountered?
LC: One of the challenges is when one of the two companies involved in the merger is much smaller than the other. It is very natural for the big company to think its model fits all. But it’s important to keep an open mind and to share best practices. In our experience, even when there’s a huge difference in size between the two companies, synergies are never a one-way street, they are always bi-directional. Getting to know the other organisation allows you to go through the integration process quite smoothly and quickly, and minimises the resistance or the misconceptions. But it’s important to take the first steps as fast as possible.
LM: I fully agree, and it confirms that procurement needs to be involved early in the process, because otherwise you have a bigger risk of imposing something that is not right. If the other company has a better practice than you, you will overlook that by forcing your standard practices on it. You also have to be careful that you get more than cost synergies, that you don’t kill the initiative in the company you have bought. I think that’s a fine balance, therefore we actively differentiate our integration strategy.
JW: Sometimes you have a choice between full integration and light integration. Normally small companies are fully integrated, but sometimes companies keep their own name and their own organisational structure, they just become an Ericsson company. That way they benefit from some of our buying power but they still have their own brand. But that’s not a sourcing discussion.
PJ: The main difficulty I have faced is the speed at which we are integrating acquired companies. In many cases we are not proactive in integrating them, and in some the fact that we are taking a long time means that we are reinforcing people who are resisting the integration. We must start on day one. On the cultural side, there are two ways: the very brutal way, where everything changes; and the way where we take care of the culture of the company. The brutal way perhaps doesn’t optimise the benefits of the integration, but it works, whereas in the other case integration often fails. So if I have to choose between something that is quick and brutal or something soft, I prefer the brutal way, definitely.
GJ: Do others agree with that?
RM: The Pfizer way goes for the best and we will get the savings we aim for. The process is quick because, in general, we use our preferred supplier base to gain the new business. This is the quickest way to achieve savings. In 2000 we took over Warner-Lambert and in 2003 Pharmacia. There was a lot of pressure on procurement to increase savings to pay for the acquisition. We did this by basically taking over the products from the other company without the full cost base that was supporting these products. One of the few groups that survived at Warner-Lambert was procurement, because it was considered best in class.
TJ: Let’s not rush at the brutal if it’s not necessary. If there genuinely is a win-win combination, as in our case, then you can approach it in a mutually supportive way. Ultimately, we don’t encourage a brutal atmosphere in our businesses, it’s counterproductive normally. We merged last April and we haven’t finished the process yet, so we’ll wait and see. Although Tata and Corus wasn’t a merger financially and structurally, it felt like one and was handled like that. On the first day that we officially joined with Tata Steel, all 300 of Corus’ senior managers were brought together at Heathrow airport, and we had senior guys from Tata join us in person and via a videolink with India.
LM: I see a challenge if we are not open to best practices in the target company. It will hurt the integration, because you get into a fight as to the best way to do things and that’s not value adding, for sure. As the acquirer, you have to be a little bit humble to accept that there might be some things in the other company that are very good. At least go in with open eyes and ears, as Luisella was saying, get the best out of that in the short run, and then take the long-term transformation to get them doing what you actually want.
LB: There are two types of cultural challenge. There’s the business culture and there’s the country culture, and that is exacerbated sometimes by the acquirer actually not being very experienced at acquiring. I was in a company that bought an American business four times its size. It was a complete failure because culturally, although we think being British we’re similar, we are working in different markets. There was no integration plan, because there was a concept that this was one country from day one. On the company culture, sometimes I’ve been in situations where you’ve had an entrepreneurial, small business culture versus a corporate culture, and you have problems there. But I find it’s the country culture that is sometimes the most challenging.
JW: It’s true, and within one country you can have cultural differences. If you try to get people from the southern part of Germany talking to people in western Germany, for example, that is already a cultural shock. But you still have to get those groups working together. You cannot fully overcome differences, you have to accept the fact that they exist. It’s something that I’ve learned to accept, and to work around where necessary.
GJ: What other challenges have you faced?
JW: IT systems. When you buy a company, even when it has the same SAP system it will have a different set-up. You have to get rid of one system and move to your own, and that’s proven to be a difficult, lengthy and painful migration, to be honest. It takes a lot of IT and consultancy, rather than sourcing, expertise.
EV: I agree with that. It starts with getting your spend cube downloaded to your business warehouse, so that you can see what they are spending. Figuring that out takes a lot of time. Hooking up their ERP system to our spend management system is one of the key challenges that we have from the start. SAP implementation takes a lot longer, so you cannot wait for that. Another key challenge is aligning all the different functions – purchasing, IT, HR – to plan how to manage the integration and decide what to prioritise. We have seen cases where a lot of good initiatives were started but then took too long because you were relying on the capacity of the same people. It means taking a decision not to get a particular synergy now, but to work on it later. That’s a challenge within Philips because different functions may have different priorities. Aligning that and getting good planning still needs some work.
LC: What makes the difference, in terms of speed, in our experience, is the ability to get it right from the cultural perspective from the beginning. One small manufacturing company we worked with in the UK bought another small company. They were enemies more than competitors and so it was a hostile takeover, where the acquired company was just supposed to adapt to the practices of the acquirer. As a result, even a couple of years after the acquisition, there were people refusing to share information, who insisted on saying they were ex that company rather than an employee of the new one. That’s an extreme example, but I think it proves that most of the challenges in M&A integration have a common cause: poor change management. If you get the change management aspect right, all the other challenges are much easier to overcome.
TJ: Taking your eye off the ball of what you’re doing is dangerous. If you suddenly get the whole organisation working with your new partner, it’s absolutely paramount that you don’t forget your existing plans and only concentrate on the synergy. That would be a disaster.
LM: One of the challenges in smaller companies is that their purchasing capabilities are not really developed. That means that they are quite operationally focused, on day-to-day, local purchasing. In many cases it’s not possible to develop those skills quickly. So you have two options: one is to leave them alone; the other is to send in a taskforce to get the work done and the synergies faster, then build a long-term plan for them to develop their skills. A taskforce can get quick results, but don’t try to impose a lot of systems on the other company from day one.
RM: We always want to minimise business disruption. Customer delivery models are merged as quickly as possible. Internally, you want to go from two organisations from one organisation as soon as possible; it’s the same for systems and for processes. I agree that you should take best of breed, but time often doesn’t permit you do that. So we prefer the rough approach; we take our system because we know our system. You can get an extremely good sales story from the party you take over, but maybe it’s not a good system at all. You don’t want to go through all the checking, you can’t afford to do it.
LC: I think another challenge is estimating time and resource requirements. I saw a manufacturing company where procurement was used as a spearhead to make the integration happen. It was a company that was growing by acquisition and making exactly the same products in different countries. Leveraging the supply base was seen as a quick win, but when procurement started it was confronted by the fact that the same product was subject to different quality standards in the different countries. In terms of qualifying and changing suppliers, this was a barrier and it required procurement people to talk to quality people in the companies, plan for new standards, and so on. That required much more time and resources than was planned for upfront. So you need to try to get enough visibility on the situation to be aware of what you are getting into and plan for it with reasonable accuracy.
GJ: To conclude, what is your advice to your peers faced with an M&A situation for the first time?
LB: If you are going to make an investment of time, it has to be with the people. A friend of mine reckons that the best team-building you can do is to go out for a beer and get drunk! If you can spend time with your opposite number, then life is easier.
TJ: Yes, get to know the people. Even if they are in India, go there and meet them. If you don’t do that, you’re dead.
LM: Get involved in the process from the beginning. Until it becomes standard practice for procurement to be involved, you have to be pushy. I believe that being involved in M&As gives you an extra motivation in your daily work, because it’s something you don’t do every day. Also, think carefully about whether one size fits all and how much you have to adapt your approach to each case.
EV: Be there on day one. I think everybody in an acquired company expects change, and if you wait too long because you are still in the planning phase, then you lose that momentum and you have to start all over again, in terms of creating awareness and a rationale for change.
RM: Contract checking is very important, because the company you are taking over have made a lot of contracts – especially the procurement and legal departments and in head office. The first thing we want is an inventory of all the contracts and how to end them. To give an example, you agree an acquisition and the next day somebody in the other company signs a renewal contract for an expensive headquarters for the next five or 10 years. You are left with a building worth €500 million or €800 million and you cannot do anything with it. So you have to be on top of your game very quickly.
JW: My main message is that your job is doing procurement, not integrating companies, which is a lot of extra work and very specialist. What I underestimated was the amount of change management required and the energy that it takes. You need to be very clear about the direction and the need for change, and then you have to reinforce that. In a sourcing department you don’t have the capacity to do all the integration work, so you really need to have some help, either from consultants or from other parts of your organisation. You can change things and overcome resistance, but it takes explicit change management and most companies are not very good at that. We need to become a lot better at managing change.
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