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.
While companies can compare lists of suppliers and what their average total spend is, they cannot compare contracts prior to the merger being finalized unless the suppliers agree to it. Most suppliers have confidentiality clauses in their contracts that prohibit buyers from sharing the terms of the agreement with other parties. This protects suppliers from price wars. For example: Company A is acquiring Company B. Prior to the merger Company A learns that Company B pays a mutual supplier 10 percent less than Company A for the same services. The two companies decide to not go through with the merger. Now Company A is armed with information it received from Company B about pricing. Company A puts the pressure on the supplier to receive the same deal, which no doubt comes at a cost to the supplier.
Many companies reap the benefits from harmonizing agreements within the first three months following a merger or acquisition. In some cases it can take up to six months to realize the full benefits. This timeframe can change based on how much experience the involved parties have with harmonizing agreements, and how much legwork was done in advance of the final signing.
As companies move on to evaluating the processes in place, they may choose not to harmonize. In some cases it is better to leave operations separate for the sake of continuity. For instance, one company may use payment cards, while the other not; one requires purchase orders, the other one not. The parties involved need to take a close look at which processes work, which need improvement and which can be eliminated. From there they can determine which culture will be followed and set a timeline for merging the cultures (if they choose to).
As with harmonizing agreements, some of the legwork can be done before the merger is final. Both parties need to look at what processes they are using and map out how the systems interact and what data points are being collected from those processes. This roadmap will be essential in determining the best course of action for addressing processes.
Harmonizing processes isn't just about the physical systems and how work will be handled. It is also about the individuals and the roles they will play in the new organization. Companies need to understand the pecking order within the company in regards to management and approvals. While titles may not need to be changed — such as manager to director — there needs to be a clear internal mapping of what each position is responsible for, who is being reported to and what authority each role has.
Other questions that need to be taken into consideration are:
- How will financial roll-ups be handled? Will charts of accounts be merged and when?
- Who is managing the risk portfolio for the supply chain and how?
- Who is in charge of the continuity of business plan and alternate sourcing?
- Is there a disaster recovery plan in place?
Post-merger, companies need to know where their risk lies and need to understand the supply chain's dependencies on any given supplier. This can be accomplished by creating a single repository for all suppliers. We recommend cross-referencing suppliers with their D-U-N-SÂ® number; this will help to identify all supplier relationships and remove duplicate entries in the files being merged.
Companies typically start harmonizing processes approximately three months after mergers. It can take six to nine months to complete this step depending on the size of the deal and the companies involved.
There are essentially two schools of thought as to how to harmonize systems, and both have their pros and cons.
First, companies can choose to place everyone on a universal platform. This will allow for seamless integration and, ideally, better communication across departments. This approach does, however, have its drawbacks. It likely will cause disruptions, especially for those that need to make the switch to a new platform, and could result in costly downtime while the change is being made and training is in progress. Companies need to weigh the potential disruptions against the value of merging the systems and determine the best course of action.
The second option is to leave the systems completely separate. Very often, this can be the most beneficial route to follow. It allows users to continue working with systems they are familiar with and leads to minimal disruptions and time needed for training. The challenge with this approach is determining how to manage and build a data warehouse between two disparate platforms that allows the company to easily view the data. We recommend employing a solution that allows companies to compare disparate information and manage duplicates in the system.
The human resources part of the equation is by far the most personal and difficult. If companies properly address these three steps, the organizational structure should be created as they harmonize the processes, and staffing requirements and skills required will fall into place as part of the plans. This will help eliminate some of the angst and help insure the right people are in the right functions while leveraging the strength of the new combined entity.
M&A can be the best course of action for a company looking to expand its product offering, branch off into new geographic regions or gain a larger stake in the market. But before moving forward, companies need to take a good look at the agreements, processes and systems in place within the company and truly understand the value each brings to the organization. A little preplanning and organization can make the process much more seamless and much more profitable.
About the Author: Jim Kelly, C.P.M., is CEO of JVKellyGroup, Inc., which provides cost reduction and risk mitigation solutions to help companies ensure their spend is effectively analyzed, sourced, managed and monitored. More information at www.jvkg.com.