Supply Excellence — Your Company is Being Acquired. Now What?

Your Company is Being Acquired. Now What?

November 15th, 2006 · by Tim Minahan · No Comments · best practices, events, spend analysis, supply management

A recent Business Week cover story touted the comeback of the leverage buyout firms, suggesting that another era of merger and acquisitions (M&A) and industry rollups and quick turn buyouts are in store. Media reports tend to focus on the accretive benefits of proposed mergers (e.g., bigger, better, market expansion, cross-selling opportunities). However, in his presentation at ProcureCon Europe Conference last week, Luc Volatier, CPO at Numico argued that revenue expansion is the lesser (and less likely) part of the M&A story.

Volatier estimates that 80% of the value of any merger comes from cost reduction — not from the new value creation touted in company press releases. Of this cost-savings component, half comes from cutting fixed costs, such as eliminating redundant infrastructure and headcount. Guess where the other half comes from? Yep, you guessed it. Reductions in procurement costs.

For those of you keeping score, that means that 40% of the hard-dollar impact of any merger or acquisition comes from supply management improvements. (My own review of the HP-Compaq merger found that procurement cost savings accounted for nearly 60% of the total synergies. A figure validated with Mittal’s recent acquisition of Arcelor.) Share that gem with your CFO next time you get push back on budget for a supply management improvement initiative.

Volatier offered some helpful hints on what supply management executives can do to ensure and accelerate success in an M&A environment. If your company is the acquirer, Volatier recommends:

Be involved right from the beginning of due diligence to ensure that your CEO knows the value procurement can contribute to the deal.
Use an external third-party to prepare the integration so that your team doesn’t get defocused from running day-to-day operations.
Meet and secure key individuals at target to ensure continuity and to avoid having top talent defect to (or, more likely, be poached by) your top competitors.
Pay attention to the “soft” parameters, such as assuring and aligning internal troops and suppliers.
It’s all about cash and time. Be sure to link your supply improvement contributions to EBITA and time-to-value.

If your company is the target of the acquisition, Volatier recommends:

Be prepared. News of the acquisition should not come as a surprise to you. Access stock analyst reports on your company so that you are fully informed.
Use the pre-merger time to prepare information and an action plan that you can present to show how you’ll contribute to the new organization. Be sure to include reference to your most successful supply management strategies.
Be positive, open, and ready to contribute. (Resistance is futile!)

I would add to these: Conduct a detailed review of the aggregate spending of both companies to accurately quantify the procurement cost reductions that can be achieved through the union and to develop strategies to accelerate realization of said synergies.

In fact, spend analysis will become an increasingly important link between supply and corporate strategies. Proof: one large pharmaceutical company that has leveraged automated spend data cleansing, classification, and analysis capabilities to help quantify and accelerate achievement of procurement cost savings opportunities for three multi-billion-dollar acquisitions. Armed with this information, the company was able to define and track over 60 category management programs to quickly leverage spend and optimize the supply base.

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