In today’s competitive world, it’s necessary for companies to stay ahead of the curve. Constant growth has become an essential component of modern businesses – and more and more companies are choosing mergers and acquisitions (M&As) as a strategy to achieve it.
Benefits of M&As
But why have M&As become the strategy of choice for growth?
For one, they are a great way to grow your business at a rapid pace. Organic growth is usually slow. Companies plan strategy, invest in production and sales, and wait to reap benefits in the years to come. M&As accelerate this process, allowing consolidated companies to jump ahead of their competitors in size and market share. Often, this provides them with access to promising emerging expertise and technology, such as with the merger of Disney and Pixar.
There are also obvious cost-reduction benefits. Merging two companies can create synergies, where duplicate offices and production units are eliminated to save costs. Economies of scale also lower the unit costs of the merged entity’s products or services, boosting overall profit and shareholder value.
And, there are benefits for businesses looking to expand into new territories. In an era of constant innovation and globalisation, expansion into new markets and territories is the norm – but it does come with risk. Businesses may face high entry barriers or culture-related challenges that they are not equipped to deal with. Acquiring or merging with a local company may help overcome those challenges.
In short, M&As can alter the trajectory of a company. This is an interesting article if you would like to read more about how M&As can affect businesses.
Using Business Focused Procurement to make the most of M&As
Whilst M&As are a great choice for rapid growth, they are also fraught with risk. Research shows that approximately 50–70 per cent of M&As fail to live up to expectations. This is largely due to inadequate knowledge about target businesses or the challenges of an M&A.
Several companies also assume blanket benefits from M&As without looking carefully at their specific case. It is dangerous to see an M&A as a ‘one-size-fits-all’ solution to swift growth. It should be undertaken with due diligence and caution. An illustrative example of a failed merger is that of Daimler Benz and Chrysler. After purchasing Chrysler in 1998 for $37 billion, Daimler Benz sold it on only 9 years later for only $7 billion.
Taking a Business Focused Procurement approach can help. In contrast to the traditional savings lead procurement approach, Business Focused Procurement is about asking the right business questions and generating shareholder value. Buying another business is one of the highest value strategic purchases a company can make, so it makes good business sense to leverage Business Focused Procurement expertise to gain valuable insights in the due diligence process. Here are a few areas that companies should explore pre-merger:
- Identification of opportunities for improving working capital and cash flow: There will be opportunities for improvement by simply improving supplier payment terms in the merged entity’s favour. Knowing in advance what the scope is of such improvements is a distinct advantage.
- Relationship with suppliers and risks in the supply chain: Most companies look carefully at the demand side of a business, but supply is equally crucial. An M&A affects relationships with suppliers and careful stock should be taken of what the opportunities and risks are throughout the supply chain.
- Problematic supply contracts: A target company may have certain contracts or processes in place that could become problematic in the future. It’s important to check supply contracts and see if there are issues that need to be ironed out before the M&A takes place. Such issues could include exposure to unreasonable levels of risk or unusual tie-ins to particular suppliers.
- Appropriate licenses: Technology often play an important role in mergers – e.g. a target company may have software that a buying company would like to possess. Part of the due diligence for an M&A is ensuring that the target company has the appropriate licences in place for its critical software, so no legal issues or unexpected licensing costs emerge moving forward.
- Assessing the target organisation’s procurement capabilities: The quality of the target company’s Procurement function is a good indication of how well you can expect their spend to be optimised. How well you can expect supplier relationships to be managed. How good they are at leveraging innovation of the supply base. Does the target company have something to learn from the acquiring company in this area, or is it the other way around? If there is a capability gap, there is also a potential for generating value in either case.
Bringing two companies together is hard work – Business Focused Procurement can make that process easier. If you are interested in finding out how, why not book a free call with Armand Brevig, our Managing Director using the form below.
