10 May 2007
What happens when your supplier is swallowed up by another company? Antony Barton examines the potential effects on procurement
Most companies leading a merger or acquisition have a clear vision of its outcomes. While for the takeover target - not to mention its staff - things are harder to predict. And what of the customers, the buyers who rely on goods and services from the merged entity?
The latest SM
100 shows buyers are divided on whether they benefit from M&A activity between suppliers (News, p10)
. While a merger may result in an increased range and availability of products, it can also limit competition and raise prices. Often, whatever the outcome, it is preceded by a period of uncertainty over supply continuity, relationships, technology and market conditions.
The Competition Commission last month ordered Noble Foods to sell Clifford Kent Holdings. It viewed their merger likely to reduce competition in the egg market, meaning higher prices for retailers and wholesalers.
While the law is designed to ensure competitive prices, suppliers' customers will be just as concerned about how the merger will affect ongoing business.
Martin Blake, head of corporate procurement at London Probation, said: "Culture clashes, the disconnection between IT systems and operational practices exacerbate what was previously a stable, predictable and manageable situation."
Disrupted operations may mean lost sales and delayed supplies but could also spell disaster for customers if they rely on critical IT support.
Beyond the upheaval, post-merger streamlining can affect business relationships. The likely reduction in headcount can mean fewer account managers, increasing the workload for those that remain and harming the supplier-buyer rapport.
But the merged supplier could be attractive to new buyers. It can exploit the best processes from each of the acquired companies, share market knowledge and create greater leverage with its supply chain to extend its products or services.
Neil Dixon, purchasing manager for Tetley Group, said the supplier could reduce overheads and invest in the latest technology: "There may also be geographical advantages in better supply chain structure or closeness to customers' facilities."
Some argue that bigger still isn't better. An interim category manager said: "Over time, this could reduce suppliers' competitiveness and slow down innovation in the market."
The Ministry of Defence last week lowered the threshold value for advertising contracts to attract SMEs, to "encourage more competitive bidding and greater innovation from industry".
Perhaps larger companies have less reason to innovate. Smaller rivals must work harder and produce fresh ideas to stay afloat.
There are exceptions to this rule, and the outcome for merged companies and their competitors is both hard to predict, and as specific as the requirements of each buyer.