There’s a marriage craze in the US – at least on the corporate side. Already this year, according to The Wall Street Journal, “the value of M&A deals in the U.S. has set a 20-year high of $821.2 billion…with 4,373 such deals so far this year, compared with 4,627 in all of 2014.”
The business drivers behind this merger mania are clear: Buyers are keen to take advantage of favorable stock prices, ample cash reserves and financing that is both cheap and available. Their unintended consequences may not be as clear.
The rash of mergers has resulted in a glut of unemployed CFOs, who according to the same WSJ article, have been among the first victims of post-merger redundancy efforts.
The consequences are not limited to finance. This merger tsunami is being led by multinational corporations, each of which has many thousands of active contracts with customers, suppliers and partners. With each corporate tie-up, the Legal department must identify, assess, and renegotiate each contract with counter parties – an enormous amount of work burdening the department and prohibiting focus on more strategic initiatives.
And what of procurement? Many of the contracts Legal will now assess will be newly inherited supplier relationships. There will no doubt be supplier overlap between those servicing the acquirer and those servicing the acquired. Companies will therefore be faced with an important, yet complex series of decisions. The post-merger environment is often one of cost cutting and the procurement department will likely be tasked with the same objective. Selecting the cheapest and most price-competitive suppliers from the now too-long list of vendors would be the easiest option – but not necessarily the correct one.
In our view, the better choice would be for procurement to use the merger as an opportunity to take a more strategic approach to supplier selection and vendor management. Here is where procurement must identify the differences between cost and value and select in favor of the latter.
A smart procurement department will seize this opportunity to look for vendors with a scandal-free track record of success and the operational ability to continue to service the company in an un-blemished manner. An even smarter and catalytic procurement department will develop a proactive and effective supplier management program around this new nucleus of vendors. We need not remind readers of the consequences of an improperly managed supplier base.
Marriage can be a beautiful thing – even in the corporate world – so long as the two parties involved are prepared for any unintended consequences. As the merger trend continues, procurement would do well to strategically tackle the challenge – and the opportunity - an acquisition provides.
Find out more about how procurement can take a more strategic approach to supplier management and the changing role of the procurement team by watching the on-demand webinar: the procurement team of the future.
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