Opportunity knocks_2

3 February 2009

3 February 2009 | Paul Snell

M&A activity has slowed but remains vital for buyers. Paul Snell investigates the potential openings and pitfalls the deals present for procurement

When SM focused on the role of procurement in mergers and acquisitions (M&A), the number of deals was at a high (29 November 2007).

But the market has dropped significantly. Last month KPMG's M&A Predictor points to a subdued year of activity in 2009 forecasts. Price-to-earnings ratios, the calculation KPMG uses to measure the appetite for deals in the market, fell from 17.1 in July 2007 at its peak to 11.9 in November 2008.

For some firms, however, the downturn has proved a good opportunity to pick up a competitor at a knock-down price, or consider a tie-up to weather the financial storm.

Last week there were proposed deals between the UK's Britannia Building Society and The Co-operative Financial Services, Fiat and Chrysler and pharmaceutical giants Pfizer and Wyeth.And KPMG is confident the market will pick up in the second half of the year.

But do buyers need to change their approach if their firm enters a merger during the downturn?

Experts agree there will be increased attention on the function as the companies involved look for short-term savings, and procurement rises up the priorities of those who look at potential merger benefits.

One reason, says Richard Nixon, partner at KPMG Advisory, is that procurement is able to undertake some restructuring and make savings without affecting a firm's headcount.And according to Bernhard Raschke, partner at PricewaterhouseCoopers, the combination of a downturn and a merger provide a tremendous opportunity.

"You have a unique window to look at what you can do. So you can prepare for when you come out of the downturn."

But, he warns, it is a common mistake to focus just on cost benefits. "There is an opportunity to cut costs, but there's a fine line where you start to cut value. It needs to be balanced."

Involvement in a merger also offers the chance to alter your supplier relationships "radically" if the tie-up triggers break clauses in contracts.

"You may be locked into supplier relationships, but a merger gives the opportunity to renegotiate them," says Luisella Chiesa, vice-president at consultancy Efficio. This is very useful in a downturn because the position of a supplier might have changed, perhaps forcing them into a merger.

But beware buyers in the corresponding function trying to lock in deals with favoured vendors beforehand which cannot be touched post-deal, warns Robin Jackson, CEO at consultancy ADR International.

Nixon advises buyers to ensure they understand the goals of the new company. What is the merger's purpose - to add value or break-up the firm? And how does procurement contribute? All agree procurement should be more involved before a deal.

"Procurement often comes to the table too late, and not in a position to know what happened" says Raschke.

And he advises not to forget about long-term planning. Consolidating procurement operations in a tax efficient location may take two to three years, but the upheaval of a merger lends the chance to reengineer the whole function.


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