12 May 2011 | Allison Ford-Langstaff and Mark Hubbard
What do purchasers need to know to successfully manage mergers and acquisitions? Allison Ford-Langstaff and Mark Hubbard have the answers
A recent snapshot of the mergers and acquisition (M&A) market by PwC showed deal volume across 2010 increased 10 per cent on 2009, and 2011 has had a good start too.
The professional services firm said improved availability of debt and increased corporate activity has raised confidence in the market. Despite a fragile economy, it noted that “there’s definite optimism in the UK and international M&A markets for 2011, and growth through M&A activity looks set to continue”.
So what issues should procurement consider ahead of, and during, such deals? What are the dos and don’ts?
What happens when people hear about a merger?
It’s about technical versus behavioural challenges. Generally, procurement organisations appear to search for the ‘technical’ opportunities in shared suppliers, more leverage opportunity, better or different systems. Inextricably linked to this, however, is the inevitable worry of having to think about job ‘streamlining’ and efficiency savings.
The usual response patterns tend to be one of three things: those who have thought about going anyway often take the opportunity to move on, those who think they can prosper look for ways to do so, while others hunker down and hope to avoid any downsizing.
Is it better to be on the side that decides to merge?
It is not so much about having the advantage
of being on the merging side, but more about
the outline of the deal structure itself. Clearly,
if one side takes the majority share – 51 per cent or more – this will affect the balance of power over time. But the real advantage is in the relationships that already exist and that
emerge throughout the exercise. That’s where the real balance of power comes from – and it can be the most politically difficult
to navigate.
What day-to-day, practical measures should procurement staff take? What are the dos
and don’ts?
Do:
• Seek out colleagues in the other organisation and initiate discussions on data, contract status, benchmarking and quick wins category by category.
• The legal process of novation allows one supplier to be replaced with another, while the existing contract continues. So consider when novation needs to take place – if quickly, then novate first to ensure security of supply. Pay particular attention to sensitive, critical or strategic spends.
• Understand the other business’s systems and processes – there may be scope there for
re-engineering.
• Check to see if they have expertise in any areas your team think of as a weakness, and
take advantage.
• Find those among you who are feeling challenged and threatened – and work to help them.
Don’t:
• Go into avoidance mode and hope it will all go away – it rarely does.
A good book to help you manage through a huge change is Who Moved my Cheese? by Spencer Johnson (Vermillion, 1999). It’s written in an easy style and will help you understand your likely stance and enable you
to consider whether that really is the best attitude for you.
If you were coming in to run the merger of two procurement teams what would you do?
• Have a clear agenda, clearly communicated, which focuses on opportunity but allows for the inevitable difficulties.
• Find the early wins and celebrate as a team activity.
• Make sure the strengths are built on, the weaknesses are defended and worked on, the wins are celebrated and that the defeats are understood.
We would build a common procurement language that builds on the best of the two previous organisation’s processes. We would then design an education programme so that not only can
this new way of working be introduced, you also train everyone to the same high standard and start the process of the teams getting to know each other.
This is something we have developed for organisations previously, including the preferred process tools and techniques. It’s worked extremely well in order to bring an early sense of togetherness for the teams.
From a synergies perspective, this training can be vital to ensure that all team members work in a way that internal stakeholders will recognise in the new merged organisation.
These early days will be vital in bringing the new ‘identity’ and ‘brand’ of the procurement team to the rest of the organisation.
What else?
People are a valuable asset. Keep everyone focused and delivering in order to help stabilise the organisation – even among the chaos that is likely to ensue at some point. Make sure there is great leadership, and communicate like a professional. It helps people come to terms with change when they know what’s going on.
What should individuals do to stand out?
Maintain a positive attitude and deliver.
What’s the worst thing you can do?
Believe that the other team is wrong. Yes, they might seem to be misguided, but they are not the other team any more.
Do M&As differ much in different industries?
From a buying perspective they don’t vary significantly, although the technical elements might change. For example, certain strategic purchases are more relevant to the consumer electronics sector than to insurance or telecommunications. That’s because the former has a largely direct spend whereas the latter deals significantly in indirect.
Sometimes the merger might involve only a portion of the overall business – consider competitive rivals O2 and Vodafone who share a common network. Ensuring commercially sensitive information doesn’t leak to the other side can be tricky, but a way through can be found, where there is a will and desire to make it succeed, irrespective of sector.
How much of a part does national culture play?
Most of the issues are about how strongly held preferences are defended by one organisation or the other and are rooted in general change management activity. International cultures only exacerbate the challenges of general change management as different cultural moirés have to be allowed for in the endless rounds of communication that are necessary for the activity to go well. So again, it’s back to the softer, relationship side that will vary from company to company.
It’s very hard to predict how that will present itself over the course of the merger or acquisition: the only thing you do know is that you can’t predict it. You have to live with the ambiguity and find ways to manage it.
How should people do that?
Our advice is the same for taking people through category or conflict management training: try to create certainties within the world of ambiguity. Detail what you do know (proven facts and data) and create a project plan with target milestones so people around you understand what you’re trying to achieve. That way, when things go wrong – and they will – you can explain why and the impact it will have, so they can help you find the best solution from the options you think are available.
Is a merger such a bad thing? Are there positives?
Mergers are fine. They are a part of the general give and take of the commercial world, and they will continue to be so. Lots of positives can be found in them.
Mergers often open up new information, give an unparalleled opportunity to benchmark data and processes, and act as a catalyst for change that would otherwise be difficult to achieve. In fact, they can be a real chance for purchasing teams to come to the fore as organisations look to them to maximise value.
On the other hand, from a specific purchasing perspective, executive-level deal makers sometimes overegg the synergy benefit. We have all been in scenarios where it is assumed that the cost base
£X + £Y means current savings rates will double.
It is a rare scenario indeed in which the deal makers will have considered the capacity constraints of particular direct supply markets – where additional volume will have little, or even negative, impact.
Deal makers may also have failed to recognise that with marketing, retaining two brands post-merger will severely compromise any leverage. After all, you’re still buying for two businesses, with two different brands and approaches.
We advise procurement departments to break down the areas of spend, category by category, to estimate the synergy benefit based on existing internal constraints. While some, like the marketing example, might be lower, others might surprise you and be higher. In other words, it may balance out in the end.
And there will almost certainly be something significant, it just might not be as quick as the deal makers hoped. If so, you have to go back to your change management plan to communicate that difficult message.
Whether mergers are good, bad or indifferent depends on the individuals that make up the teams. Those who relish change will see it as a huge opportunity and a chance to add something a little different to their CV.
For those who consider stability to be paramount, it can be a disaster. Their current way of working, the people they work with and the culture of the company is all about to change, so they are unlikely to like it. And then there are always the “whatever” crowd who simply go with the flow.
Will we see more M&A activity going forward?
Last year saw a lot of corporate M&A activity. Risk has perceived to have fallen since the height of the financial crisis. The second half of 2010, in particular, saw some multi-billion dollar takeovers, such as General Motors and AmeriCredit Corp and Intel and McAfee.
Conditions will continue to be attractive for companies in 2011, and even accelerate, as economic weakness makes more attractive bid targets, and as the pent-up appetite for M&A drives activity forwards. Certainly from our own experiences with current clients we are seeing healthy activity in this area.
Remember, M&A works both ways as well; divestment and demerger also happens, with many of the same challenges.
The merger of procurement and other back office teams is going to happen more and more in the public sector – does the same advice apply?
Yes, it must do. The core issues are about change, and that’s a constant.
Do mergers always deliver expected synergies?
They hardly ever deliver what was expected – the numbers may well be reached but usually via alternative means to those suggested at the start. After all, it’s a live process and the organisation changes its plans accordingly – and rightly so.
More than half of all mergers or acquisitions are deemed to have failed by shareholders. We believe that where this does happen, it is largely because the culture and relationships of the people that make it happen has been overlooked in the rush for synergy benefits.
If you had your time on an M&A again, is there anything you should have done?
High-quality change management is needed to pull organisations together. As ever, excellent leadership, clarity of purpose and a shared common goal need to be fostered and built on. Communication is a massive and continual need, and something we can all get better at.
Anything you would do differently?
Do the stuff above really well.
Technical considerations
• Draw out, category by category, annual spend, supplier(s), contract status, etc
• Novate first, strategise later, if time is of the essence, to ensure continuity of supply
• Get weekly or monthly savings tracker documentation to monitor your synergy forecast and implementation
• Don’t underestimate how busy the team will be in delivering the synergies (this is not a typical day job)
Potential options
Consider ringfencing a small team of current staff to co-ordinate the process or bring in external support to manage it. This allows the buying team to deliver while the ringfenced team manages the communication of messages, both of successes and challenges
Cultural considerations
• Create a thorough change management programme with robust project and stakeholder management plans
• Communications planning could well be a workstream in itself: internally to both the procurement team and to the stakeholder community, and externally to the supply base
• Leadership and style are hugely important at all levels: when the pressure is on, people need to feel supported by management. Create a robust structure of formal and informal events to make this happen
Potential options
Consider a training and education programme to train a new, merged procurement way of working and get people together. This investment will make people feel valued
About the authors
Allison Ford-Langstaff and Mark Hubbard have worked together on a number of M&A activities as well as consulting and education projects. They have experience across a number of sectors including pharmaceuticals (Glaxo Wellcome, SmithKline Beecham, Novartis); banking (Barclays, The Woolwich), insurance (CGU, Norwich Union), industrial engineering (Perkins, Caterpillar) and grocery (Heinz, ABF). They have experience of working in everything from the ‘clean team’ environment to ‘post-merger mop-up’.
☛ Allison Ford-Langstaff is director and founder of Rightsource Solutions and Mark Hubbard is a director and founder of Positive Purchasing
