The integration conundrum
Alex Klein, COO at Efficio, was recently interviewed by Malcolm Wheatley of Procurement Leaders on the role Procurement synergies play in the value proposition of mergers and acquisitions. This article was originally published in the May/June 2016 edition of Procurement Leaders magazine.
Procurement synergies are a key part of the value proposition of mergers and acquisitions. But, while an alarming number of such deals deliver no value to shareholders, Malcolm Wheatley asks what has held procurement back from a starring role?
Estimates vary, but most observers agree that roughly one-half to two-thirds of all merger and acquisition (M&A) deals fail. That’s even when success is defined fairly loosely – such as avoiding the almost total collapses seen in the high-profile mergers of Alcatel-Lucent, Daimler-Chrysler, Royal Bank of Scotland-ABN Amro, and AOL-Time Warner.
The latter, of course, is particularly notable as 16 years on it is still both the largest corporate combination of all time and one that is almost universally regarded as the worst merger in history. Just two years after the $165bn deal, AOL took a write-off of $98.7bn and started to look for the exit.
This all matters because when companies announce mergers or acquisitions, there are often ambitious objectives in terms of procurement savings.
"Retender the entire combined spend out to the market and get a better deal all round. Once the combined spend is with a supplier, that opportunity has been lost"
Take last year’s announcement by global telecoms company BT that it was negotiating a merger with mobile operator EE, jointly owned by Orange and Deutsche Telekom. Procurement efficiencies were expected to play a significant role in delivering savings of around £70m per year in operating costs. Similarly, the proposed $100bn plus acquisition of brewing giant SABMiller by fellow global drinks giant Anheuser-Busch InBev is expected to deliver more than $2bn in cost savings should it go ahead, according to broker Canaccord Genuity. Procurement is predicted to deliver around one-fifth of this total.
Nor is it difficult to understand the attraction of post-merger and acquisition procurement savings to chief executives, or why M&A announcements routinely have rough targets pencilled in as a way of convincing often sceptical investors that proposed deals make sense.
To begin with, purchased goods and services make up a high proportion of many businesses’ overall costs – as much as 60%-70% in a manufacturing business, and more than one quarter of overall spend, even in service-centric organizations, such as financial institutions. So the logic is easy to see: as with bank robber Willie Sutton’s explanation as to why he targeted banks, that’s where the money is.
Moreover, procurement savings can be measured in hard cash, unlike less tangible efficiencies and synergies that, like at AOL-Time Warner, can all too often quickly founder on the rocks of internal politics, organizational inertia and turf wars, as well as outright culture clashes.
What’s more, observes Alex Klein, COO of procurement consultancy Efficio, post-M&A procurement savings have the attraction of imposing most of the pain on the supply base, rather than the business itself.
“It’s easier and less unpleasant to go after cost savings from suppliers because the alternatives generally involve headcount reductions inside the organization,” he points out. And particularly when post-M&A cultural issues are expected to be a challenge, he adds, organisation-wide headcount reductions are not the best basis on which to win the battle for hearts and minds.
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