With finance having all but dried up, the global economic crisis has had a devastating impact on merger and acquisition activity. According to figures released by Mergermarket, an M&A intelligence service and analyst firm, the total number of deals announced in the first half of 2009 was 52 per cent lower than during the same period the previous year. This figure would have been even more depressing were it not for three mega-deals in the US pharmaceutical sector – Pfizer’s takeover of Wyeth, Merck’s move for Schering Plough and the takeover of Genentech by Roche – which together accounted for 23 per cent of the value of all transactions. Other major deals included the protracted buyouts of the car-maker Chrysler by Fiat and, in the UK, Lloyds TSB’s takeover of the failed bank HBOS.
Yet there are signs that the market could be preparing to come back to life, as cash-rich companies eye up rivals at rock-bottom prices, private equity funds are forced into selling their best assets and distress purchases increase as banks discover an alternative to closing down failed organisations.
“Some companies will have no other solution than to be acquired or to merge with someone else because of the economic situation,” says Luc Volatier, executive in residence at the IMD business school in Switzerland. “There is quite some money now being collected by specialised distress funds and they are just waiting for the right moment to jump on their prey.”
Disruptive dance
John Kelly, head of integration advisory at KPMG, adds: “There’s a level of noise underneath the surface where people are courting each other prior to a dance. If you’re a consumer markets business and the whole market is down by 50 per cent, there’s an equivalence there. If it’s a share deal and I’m paying with my devalued paper for your devalued paper then we can do that deal because nobody loses. Those sorts of thing are certainly being contemplated.”
As its most fundamental, such activity can be hugely disruptive for CPOs, who have plenty of other issues to contend with right now. The Australian mining group Rio Tinto, for example, spent almost two years wrestling with its takeover of Alcan and a subsequent hostile takeover bid by BHP Billiton, which eventually failed late last year in the wake of the global financial crisis. “A very big challenge is how you drive your strategic objectives in the face of significant external factors that could really disrupt you,” says Scott Singer, head of procurement at Rio Tinto. “It put a lot of emphasis on myself and my leadership team, despite these external events that invariably change priorities, to stay absolutely focused on what we believe to be key value drivers for the procurement and supply management function.”
What M&A means for us
A CPO’s experience of a takeover or acquisition is likely to depend on whether they are part of the organisation doing the acquiring or being taken over. On the acquirer side, the key is to get as involved as possible in the due diligence and post-acquisition support process while maintaining the day-to-day activity, says Jonathan Watt, former CPO at Vestas and a veteran of several acquisitions and takeovers.
“One of the important things to do is to quickly identify the key people in the business and try and make them feel comfortable about the future,” he says. “This is done appallingly in most companies. There’s a lot of fallout from an acquisition; people start leaving and those who leave are the best people. It’s because of the uncertainty, as well as the acquiring company normally handing out the commodity lead buyer roles to the people that they already know in their own organisation.”
Patricia Gaglione is senior vice-president, business operations and supply chain, at New York-based home products company Jarden Corporation, which has grown from a $400 million to a $5.5 billion company over the past five years, largely through a series of acquisitions. Her department is involved early on in the process and develops an individual plan for each transaction that covers the first 30, 60 and 90 days and how to handle uncertainty among acquired personnel.
“If we’re not sure about redundancies, we’ll say that,” she says. “We’ll say we’re still evaluating the future of the business and we’ll give an estimate of a date when we will be more specific. In some cases they have no intention of changing anything and it’s relatively invisible to people on the operations or supply chain side. Each acquisition is different so we don’t have a standard formula.”
For Karen Coker, a US-based senior procurement manager who was until recently working for a technology organisation, spending time to educate the acquired personnel and managers in the processes, policies and IT systems of the new organisation is essential, both to ease the transition and to reduce the risk of resentment among new employees.
“You also need to incorporate and understand the policies and procedures of the acquired firm,” she says. “There may be some strategic, regulatory or problematic process that is addressed, or practices, customers or vendors may require that the procedure be in place.”
If this is the case, you may have to train your own staff as well as new ones, she says, in addition to new internal customers and vendors.
Driving M&A savings
The biggest challenges for CPOs will be to deliver the expected savings that are a driving factor in such deals. IMD’s Volatier suggests that 80 per cent of the savings identified before a takeover tend to be cost – rather than revenue – savings and 50 per cent of these are expected to come from procurement. Rio Tinto, for example, told the market it would make over $1 billion of synergy savings so Singer was under pressure to deliver “a fairly significant number” in early 2008 when many commodities were at record highs.
“It’s just a given,” says Jarden’s Gaglione. “That’s a big reason why we do it: because we can leverage our spend. Can we do it in all situations? No, because a part or materials in the line may be practically unique and there is only one company able to supply it. But often the raw materials are common so we rarely run into situations where supply source is a limiting factor.
“It’s more about whether they can support Jarden and the new acquired company, not only for cost but also innovation and quality, and whether they’re able to extend their footprint and their support of Jarden into other businesses.”
Emphasis on suppliers
One way of achieving synergy savings to put the emphasis on the suppliers themselves, says Eamonn Phillipson, former strategic sourcing director at Texas Instruments, who has experienced several such situations.
“My particular way is to ask them how they think they will be able to contribute to a more cost-effective organisation,” he says. “I’m not actually telling them I want a 10 or 20 per cent price reduction; what I’m saying is that those that contribute the most are the most likely to be successful in terms of the suppliers that are retained. This approach encourages creativity from suppliers rather than just creating a bidding war.”
But Watt sounds a word of caution. “I was involved in one takeover where the CEO thought we were just bundling,” he recalls. “But often you have two companies that are involved with the same supplier getting together, so the supplier had all that business anyway and you have to be extremely careful.
“Yes, bundling does work. Yes, price comparison at a most fundamental level can work. The acquisition cost should fall to the lowest level between the two companies and there should be some benefits there. But where CPOs fall over is in the due diligence phase when they sign up to post-acquisition integration savings from purchasing synergies. I’ve had some nasty experiences there.”
Richard Nixon, a partner at KPMG procurement advisory, also points out that many CPOs are under so much pressure to create value that they can overlook risk management. “I’ve seen examples in businesses where procurement has done a great job in driving line item savings but because there hasn’t been the right level of connection with the treasury, finance and other parts of the business, the wrong decisions have been made on hedging or on foreign exchange management,” he says.
“What will be measured at the end of the day will not be how much we reduce costs by but the impact on profitability and share price. In the current environment it may also be the impact on cash.”
Ensuring that you are in a position to raise such issues and making senior executives aware of the value you are delivering is also important, says Bernhard Raschke, director, post-deal services at PricewaterhouseCoopers. “If you’re on the board, you’re part of those discussions anyway. If you’re not, then you’d better align yourself with senior management. It can be a great opportunity if you have an ability to communicate.”
Moving on
For those on the acquiree side, though, it’s a very different story and one that often ends in redundancy. Volatier points out the success Procter & Gamble has had with procurement since it took over Gillette when both CPOs were retained but this is the exception rather than the norm. “You’ve got to rely on your CEO to put your name forward and say they’d be crazy to lose you because that’s part of the value of the business,” Watt explains.
Ex-Texas Instruments director Phillipson has found himself on the receiving end on one occasion. “It was a backward step,” he says. “I’d not long taken the decision to move to the company’s location, buy a new house and put my daughter into a new school. Then you find a few months later that you don’t have a job.
“On a personal level you have to make a decision: are you going to risk uprooting the family again or do you stay working locally? From a professional point of view, I think it took me four years to advance past the position from which I’d been made redundant as a result of the merger.”
Another CPO, who wished to remain anonymous, recently saw his company agree to be taken over by a larger rival. “The key question for me was not so much do I have a job but do I want a job in the new organisation, given the number of different roles I could have in the business,” he says. “I took a decision fairly early on in this process that actually I didn’t want to be part of it.”
There are, however, strategies that can help CPOs in this position. Phillipson advises keeping an eye on credible rumours in the marketplace and identifying potential partners, as well as keeping up to date with your own company’s financial and business position. Consider whether your organisation could be looking to acquire another business too. “Do you have a lot of cash but not a lot of cash flow, for example?” he asks. “And on a personal level, watch out for changes at the top of the company, especially if they’re unexpected and affect you directly.”
On a professional level, the aim should be to give the new owners as full and frank a picture of the current procurement setup as possible, says the unnamed CPO, something that runs counter to the trend in many organisations to focus only on the positives. “In doing that, I can give exposure to my team and the individuals within that who have been successful,” he says. “If you’re kept in the back room it will only increase the uncertainty.”
Volatier warns: “The biggest mistake you could make would be to block things because you’ll probably be kicked out. The minute it’s announced that your company has been taken over, talk to your team because during tough times such as mergers and acquisitions people need strong leadership. And even if you’re on the acquiree side, use it as a learning opportunity. Even it’s if only for 12 or 18 months, make sure you learn.”
There are also positive points that can result from acquisitions or takeovers, even if the result is a parting of the ways. “It’s a superb benchmarking opportunity,” says Volatier. “When CPOs benchmark themselves against their peers, it’s always done with a certain caution because you never really have access to information. But when you merge or buy someone you really go into the nitty-gritty of procurement practices.”
KPMG’s Nixon adds: “There is only a certain number of CPOs who can say they’ve gone through this process and done either pre- or post-deal activity. It is a different environment because there’s a sharper focus on results in a certain timescale and there are certain points in the process where you don’t have access to certain information, and performing ten takes a different skillset to the usual one. It’s not necessarily a glass-half-empty situation for CPOs.”
For those CPOs who feel their organisation could be on the acquisition trail or a potential target in the next few months, it’s worth remembering that such situations are largely beyond your control.
“If anything, I’ve learned not to get distracted by external events,” says Singer at Rio Tinto. “Try to stay focused because you’ve got a job to do regardless of that. It’s hard but you have to set a very strong leadership objective about staying focused on your journey. Don’t let external events manage you.”
Part of the family
When UK business Land Securities sold its commercial property division Trillium to Telereal in January 2009, the new business began a process of integrating the two procurement departments that is still ongoing.
“There are still effectively two procurement departments,” says Clive Dedman, head of procurement at Telereal Trillium. “In some of the areas on the Trillium side we have total cost responsibility, and in others the procurement department leads the negotiation but the actual contract itself is with the client.”
The business has also started to consolidate the two supplier bases. Dedman estimates each company had around 1,600 suppliers, with around 700 in common. “We are negotiating common prices so our business doesn’t lose any advantage or leverage for the combined spend,” he says.
Perhaps the biggest change, however, has been going from plc ownership to a privately owned family business in the shape of the William Pears Group.
“There is a much greater control over spend and cost centres but you also have a much more immediate decision-making route,” says Dedman. “In the plc environment you have all sorts of shareholders with different wishes and it’s often tricky to satisfy all of those.”
