Elevating Procurement’s Value in the M & A ProcessWith investors generally looking to earn back the acquisition premium in an 18 to 24 month time-span, it still remains surprising that the purchasing function is not generally acknowledged in the pre-deal phase. In a typical process industry company, procurement spend (both direct and indirect) can represent up to 60% of total cash outflows. Unlike the efforts required to integrate functions like production or manufacturing, which may involve painful headcount reductions and expensive write-downs, procurement transformation can be relatively “pain free” and only requires limited up-front investment. Critically, procurement transformation can take place rapidly and start generating bottom-line savings soon after the deal has closed. This not only allows companies to quickly demonstrate the merger’s benefits to their shareholders, but also delivers critical momentum internally. Shareholders will be pleased to see that the price of the acquisition is beginning to be repaid, while employees will see that combining forces generates positive results, which in turn encourages cooperation and commitment to successful integration.

It will be clear to CPOs and other procurement professionals that M&As are a natural trigger for pursuing procurement synergy. Concentrating volumes, pooling buying power and harmonising company-wide specifications are all familiar strategies that sophisticated purchasers deploy, and such measures are particularly appropriate in the wake of a merger.

Compared to the changes that other parts of the company may need to undergo, such measures are relatively easy to implement and help to establish long-term value for the organisation. Additionally, the overall shake-up generated by a merger or acquisition provides a good trigger point to refocus complacent supplier relationships and generate easy savings to the bottom line.

Commonly sought synergies such as scale buys and purchase process consolidation often contribute between 25 percent and 50 percent of targeted M&A benefits. However, fully achieving these goals is far tougher than many companies think. And even when they get it right, most organizations find that rudimentary improvements are insufficient to justify the deal. The big inhibitor often is lack of awareness and expertise in key sourcing and procurement areas, such as blending company cultures, harnessing global talent, integrating e-procurement systems and maintaining a “business as usual” service for internal stakeholders.

The results are, sometimes, not reflective of anticipation. Millions of dollars in “expert consulting” fees later, it seems that win are, yes, the advisors. The reports from both financial analysts and the media are that many, if not most, mergers fail. Various surveys have confirmed these results. Further, there have been numerous reports of culture clashes, confusion, and internal disruptions when two companies are combined-with dramatic declines in employee and customer satisfaction, leading to significant declines in profitability. Loss in shareholder value is staggering, with one study showing that 61 percent of recent mergers destroyed shareholder wealth. The Daimler-Chrysler merger quickly decreased market value by $60 billion. Thus, not only did Daimler-Benz get no value from Chrysler Corp., it further destroyed the value of Daimler. AOL Time Warner Inc. was forced to take a $54 billion charge against earnings as the value of the merged assets declined after the combination. Why do so many mergers fail? HCM are not experts in merger failure analysis. We have observed, however, that cultural differences are often used as explanations of organizational problems following mergers. Other determinants of merger success have generally been identified as strategic vision, strategic fit, deal structure, due diligence, pre-merger planning, post-merger integration, and external environment. Immediate action should be focused on a few relative “quick win” initiatives: information security, HR integration, communications integration and yes, procurement should be a key focus of M&A strategy. We’re not saying it’s easy...

The DilemmaThe IT, HR and Procurement functions should prepare for, and adjust to, restructuring resulting from mergers and acquisitions. M&A activity often creates anxiety among both suppliers and employees, and executives who’s neck is on the line to show results must drive IT, HR and procurement organizations to ensure smooth transitions resulting in savings and value creation.Steps to ConsiderEnsure that Procurement and the Line of Business / spend owners are on the same page. To produce maximum value, it is essential for procurement to align its objectives with the goals of cross-functional stakeholders, the new entity’s corporate strategy and the deal itself. In effect, procurement leaders need to make a formal effort to maximize procurement’s relevance. In one example where we participated, we

recognized an opportunity to implement zero-based budgeting and to link this capability to the combined entity’s new category management processes. Consequently, all planned expenditures for indirect materials had to be justified from a zero base, and the procurement organization was linked to the signoff process. This helped to ensure that procurement people, processes and organization were aligned with all expenditure projects.

Early involvement by procurement is key to realizing the synergies that inspired the deal in the firstplace. Inadequate planning” is one of the top reason their mergers achieved lower-than-expectedsynergies. Arriving early would seem to be a no brainer, given that procurement organizationstypically control or influence between 60 percent and 90 percent of a company’s expenditures. Moreover,achieving M&A-related savings in procurement is often faster and simpler than in other areas, such as IT, operations or front-end departments where savings are often linked to asset write-offs, long-term replacement programs or headcount reductions. In addition, spend-related savings typically can commence at the very onset of the post-merger integration process if these savings opportunities have beenassessed and qualified by the time the deal closes.

Sourcing departments tasked with driving spend optimization from merger realities, would do well to engage in re-merger integration planning, to ensure efficient and structured procurement integration, companies must outline detailed plans before mergers close. Some procurement organizations create standardized checklists to chart each stage of integration and structure the integration process. We would suggest to use third-party consultants to aggregate information that cannot legally be shared before mergers are approved such as contract terms and supplier lists. Another activity on the “must do” list is to strategize how to centralize common spend to generate savings; many companies realize M&A savings by rationalizing the supply base and centralizing common spend areas across the firms’ business units – valid for both direct and indirect spend bases. Procurement can also work with the combined lines of business to rationalize component requirements among merging product lines to maximize spend optimization strategies on identical part numbers. And finally, the issue that has bitten my buttocks a few times, one should pay close attention to the integration information systems and back-office functions, merging organizations must quickly integrate information systems and back-office functions to create spend visibility and information flow across the enterprise. Organizations that foster cross-merger communication early in the integration process save time and generate savings more quickly. My failure to recognize the merger issues led to an environment that ultimately became unsustainable due to complexities, lack of spend visibility, reporting difficulties and costs.

When firms turn to the procurement function to fulfill M&A savings goals of mergers and acquisitions, procurement organizations move beyond volume spend models to achieve true synergies. Companies rely on procurement to help deliver bottom-line savings. Executives that drive mergers and acquisitions are particularly focused on achieving procurement savings because these savings are quickly demonstrable to outside investors and analysts that the right decision was made. . For instance, during the 2001 Dow-Union Carbide merger, procurement was responsible for more than 20 percent of overall merger savings. Likewise, during the merger between SmithKline Beecham and Glaxo Wellcome in 2001, the procurement organization was responsible for more than half of the estimated $2.4 billion post-merger savings the companies promised investors.

Procurement organizations achieve the majority of cost savings by rationalizing the merged entity’s supply base. During the HP-Compaq merger, purchasing and supply chain were responsible for generating $800 million in savings, the majority of which came from a $550 million savings in direct materials purchasing.3

Procurement professionals can capture savings in four different supply areas, illustrated by the table below.

Same Supplier Different Supplier

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DIFFICULTY: LOW DIFFICULTY: LOW

DIFFICULTY: MODERATE DIFFICULTY: HIGH

Spend optimization easiestto achieve as increased spend volume allows to achieve % cost savings

Possibility to gain spend volume discounts by consolidating goods and services from the same supplier

Sourcing can drive LOB collaboration so that components can be rationalized thus allowing for volume leverage

Spend optimization relatively easy through supply base rationalization and spend volume leverage