By Jim Kelly
A merger can be one of the most successful business moves a company makes. It can also be one of the riskiest. Just ask the teams at Continental and United Airlines. Aside from the questions about the resulting revenues and brand management, the deal brought to light a series of questions that everyone should consider when going through a corporate merger.
Where do companies start when addressing a merger from the perspective of the supply base? How will they manage two supply bases? Supplier rationalization is usually one of the first steps a combined entity will take, but all too often there is more madness than method when consolidating the supply base.
While most companies wish they could flip a switch and make a post-M&A supply base simply appear, all too often they don't start that work until after the deal is done.
Surviving M&A can be broken into three basic steps:
- Harmonizing agreements
- Harmonizing processes
- Harmonizing systems
A lot of behind-the-scenes work is required to synchronize the supply chain — and it should be part of the early stages of any M&A activity. From the time a merger or acquisition is even a nascent possibility, companies on both sides of the deal need to look closely at these three steps and put in place a timeline for achieving each step. Some can be realized relatively quickly (within three months) while others require a longer time investment of up to a year. Note that staffing decisions can be best done only after you have addressed these three steps and have a plan ready to complete them.
Here's a look at what goes into accomplishing each step and what companies need to keep in mind as they move forward.
Harmonizing agreements is perhaps the most straightforward and least time-consuming step of the merger and acquisition process. It begins before the parties involved have even drawn up the final contracts, and it is a best practice that companies should embrace even if they are not preparing for M&A.
As companies prepare for mergers, they need to take a look at all contracts — from raw materials to office supplies and property lease agreements. It is essential to have a clear understanding of where money is being spent and the criticality of each of the organizations with which the company has a relationship — however big or small that organization may be.
For the company being acquired, it is important to look at the fine print on all agreements, including expiration dates, contractual obligations, renewal requirements, out-clauses and insurance requirements. Having this information in a company's arsenal helps to determine the best course of action once the harmonization process begins. It is important to keep in mind that the contracts negotiated by sourcing organizations have tighter agreements and are more geared toward protecting the buyer than the supplier.
One of the first things companies do after a merger is to compare contracts and identify opportunities for synergy or cost-savings when merging the two groups. The parties involved need to disclose major spends, major suppliers, contracts, work orders, SLAs and so on. On Day One of the merger, they want to identify as much savings as possible. This may be realized by canceling contracts, merging agreements or leaving things as is.
Companies purchasing a subsidiary from another company need to be wary of pricing the acquired company may have in place with suppliers. It can be difficult to get a true sense of what a company's spend is with a supplier, especially if that company was operating under pricing that the larger, parent company negotiated. Those great deals do not necessarily follow the subsidiary when it leaves the nest, which can result in price increases for the acquiring company.