Realising merger & acquisition (M&A) synergies faster
2015 saw the highest level of merger and acquisition activity in the UK since 2007 according to research by Experian. In fact, over 6500 mergers and acquisitions were completed in the UK in 2015 with a total value of £433bn. This was the highest value of deals since 2000.Brexit, the US election and US legislation changes have been blamed for a slight downturn in M&A since then, but nonetheless according to Dealogic the average merger or acquisition in 2016 was $104.2 million, and Deloitte reported that the corporate mid-market (£250m to £1bn) remains “robust” with deal volumes comparable with all-time highs of 2015.
Huge sums are at stake when it comes to merger and acquisition.
In October 2016 Qualcomm announced that it would purchase NXP for about $47billion. The purchase would broaden Qualcom’s offering — expanding its range of semiconductor products to include chips for self-driving cars, mobile payment services and drones. Abbot Labs purchased St Jude’s Medical in 2016 for $25billion, reportedly giving Abbot Labs “more pricing power in the market”. Tesco recently announced its intention to purchase wholesaler Booker for £3.7billion. Booker owns Budgens, Londis and Premier Brands franchise stores. It owns Makro cash and carry, has an online service and a large food services arm supplying restaurant chains, pubs and caterers. Tesco believes that the deal will lead to savings of £200m per year and boost annual profits by £25m after three years. It was reported by the Telegraph that Tesco claims the deal will “give its suppliers more customers to sell to” and make the “supply chain from farm to retailer more efficient”. If it goes ahead, it looks like Tesco’s mighty buying power will increase even further.
So why are merger and acquisition success rates so poor?
A KPMG study found that 83% of mergers fail (in that they failed to boost shareholder returns) and a McKinsey study that reviewed M&A activity over 30 years stated that:
- 77% failed to meet their intended business objectives
- 50% failed to recover the documented costs of the acquisition
- 30% later abandoned the merger
A recent case in point was Pfizer and Allergan who in April 2016 announced they were abandoning their $160 billion merger, resulting in Pfizer footing the bill with a $150m break-up fee. Their case was unfortunate in that the new US tax legislation introduced post-merger that effectively destroyed the potential financial benefits might not have been foreseen. More usual is that acquisitions and mergers fail because of cultural clashes. Studies have shown that over half of the thousands of failures reviewed were blamed on cultural issues. Forbes goes further and claims that the root cause of EVERY merger’s success or failure is culture. “The game is won or lost on the field of cultural integration. Get that wrong and nothing else matters”. Unsurprisingly, then, many merger and acquisition consultants tend to focus on ways to get the culture right. Focusing on brand, communication, employee retention and other issues is undoubtedly essential for many acquisitions and mergers. Pharmaceutical companies combining research teams, professional services companies merging to create an increase in market share or manufacturers combining their asset based to produce more absolutely need to take care of culture.
Focusing on realising the benefits
Back in 2009, Bain wrote in their “10 steps to successful M&A integration” that companies fail in three main areas:
- Missed targets. Having signed a deal, businesses fail to focus on why the deal was made in the first place, and in focusing on the “integration”, fail to focus on making the real drivers happen
- Loss of key people
- Poor performance in the base business, due to:
- The distraction caused by the merger
- Poorly managed systems integrations
- Poor customer communications
A fantastic example of avoiding these issues is demonstrated by Costcutter Supermarkets Group & Palmer and Harvey. Costcutter has 2600 stores throughout the UK. Palmer and Harvey are the UK’s “number 1 delivered wholesaler” with an annual turnover of over £4bn serving convenience and forecourt shops across the UK. They avoided a merger completely, have kept their brands, systems, people and cultures intact and instead have invested 50/50 in a new venture called The Buy Co.The Buy Co’s aim is to “transform the UK convenience sector by harnessing huge combined volumes and working with suppliers and retailers to achieve a signification reduction in the cost of goods.” They estimate this adds up to an “unrivalled £5 billion worth of negotiating power”. Instead of focusing on the integration of two disparate cultures, systems and brands, they are completely focused on a single goal — to improve buying power.
How to deliver merger and acquisition benefits faster through improved buying power
Not everyone can, or wants too, adopt the Costcutter / Palmer and Harvey model. Others want to enjoy economies of scale across the whole business and for them, a merger or acquisition is the better approach. Nonetheless, for businesses who buy and sell finished goods, after staffing levels, one of the most important areas for review is usually procurement. To drive out economies of scale post-merger, these companies look to analyse procurement spend and consolidate procurement contracts in order to drive out cost savings. Post-merger procurement integration is challenging enough when there are contracts with different suppliers, or contracts with the same suppliers but with different start dates, prices, delivery costs and payment terms. Given the number of variables, it can be fairly complex to map out price comparisons between products purchased in different locations from different suppliers. That complexity is multiplied in businesses where discount programs and rebate claims are common. Good examples of situations where accurate discount calculation and supplier rebate management include many companies involved in buying and selling finished goods such as buying groups, building supplies, and retailers. Calculating accurate net-net pricing and projecting forwards to identify the most advantageous procurement deal can be almost impossible using spreadsheets. Likewise, many ERP systems don’t handle all of the complexities of supplier contract modelling very well. Typical problems that we have seen include:
- Consolidating any information across disparate ERP systems
- Consolidating purchase history and purchase projections by product where different units of measure are used.
- Analysing multiple contracts from the same suppliers in different parts of the newly formed group
- Comparing supplier pricing where different units of measure are used from each supplier. For example, one may supply by the pallet and another by the kilo.
- Modelling contracts with retrospective payments, such as rebates, retrospective discounts, royalties, purchase income and back margin
- Calculating net pricing when comparing suppliers with different discount structures and supplier rebate programs
DealTrack, however, was designed to help procurement teams manage and model situations with any or all of the above complexities.