Six Ways Purchasing Can Screw Up an M&A Deal

Big M&A deals are in the news almost daily. ChemChina is absorbing Syngenta, Yahoo is being bought out by Verizon, Walmart is snapping up Jet.com, AB InBev is drinking up SAB. Procurement clearly is more important in some deals (e.g. AB InBev + SAB) than others. When significant procurement synergies are expected, the approach that our function takes to due diligence and integration can make-or-break an acquisition.

Murphy’s Law – What can go wrong, will go wrong – certainly applies at any stage of the process. However, awareness of the potential pitfalls (together with a seat at the table during due diligence) can enable the procurement manager to effectively navigate shark-infested M&A waters, and help assure that management makes the right call in the decision to buy or sell a business. Some of the most common pitfalls, in my experience, include:

1) Lack of preparation for due diligence. Are you prepared? Benjamin Franklin once said, “By failing to prepare, you are preparing to fail.” Step one, before any potential transaction comes along, is to have prepared in advance a standard set of questions and data that you’ll request from the target. I suggest preparing a short list of must-have information, and a longer list of “nice-to-haves”. Every transaction is different, but usually you’ll have a shorter preliminary due diligence step followed by a longer and more in-depth due diligence after a preliminary agreement is made. 

2) Over- (or under-) estimating procurement synergies. How much incremental procurement cost reduction will result from the acquisition? Aim too high and you will be unpleasantly surprised when the synergies don’t materialize. Be too conservative and you risk unnecessarily killing the deal. That said, there are steps you can take during due diligence to increase the accuracy of your procurement synergy estimate. For this your data request is key – what is the spend, in which categories, who are the suppliers, what is the cost reduction track record, what is the percentage of emerging market sourcing – these are just a few important questions to ask up front. Equally important is your understanding of the same data within your own company as well as the relevant supply markets, so a reasonable estimate of mutual cost reductions can be made.

3) Overlooking dis-synergies resulting from a divestiture. What happens when you sell a business? If you have corporate-wide procurement agreements in place with suppliers you risk losing that joint-buying synergy. Be sure to pro-actively renegotiate those agreements to minimize the fall-out after the sale. In some cases you may be divesting an internal supplier – selling a business that provides components or services to your other businesses. Be especially careful in these cases to have a rock-solid supply agreement as an integral part of the agreement of sale.

4) Ineffective risk assessment of the company’s suppliers. Does the company have single-sources for critical materials? Are there chronic supplier quality issues? Are any key suppliers in a poor state of financial health? Most procurement managers have a process for supply risk management that they follow with their supply chain (I will share my methodology in a future post). However few do an effective job of checking the risk of an acquisition target’s supply base. Again, Murphy’s law is in play, but the damage can be minimized with effective questions (and answers) during the due diligence process.

5) Compliance issues. Are the target company’s suppliers compliant with your company’s supplier code of conduct? Are the buyers of the new company “on the take” from suppliers? Is the supply chain itself legitimate? This is another area that can be difficult to adequately cover during due diligence. It’s therefore very important to be on the lookout for red flags during the due diligence process. For example, if the target company is located in an emerging market country and most suppliers are small local companies, the compliance risk could be high. Ask to visit some of the suppliers during due diligence to check this first-hand. Be sure to request copies of supply agreements during due diligence (do not always expect to receive them – again, every transaction is different!) – These will give you valuable insights in to what the target company values in supplier contracts. Also, check the ownership structure of key suppliers – Is there any relationship to the owners of the target company? If so, this is a HUGE red flag that should be investigated deeply.

6) Poor integration planning and execution post-deal. You’ve done your due diligence, you’ve made the deal and the closing date is upon you…Now what? Just like due diligence, planning is key. Before even starting the M&A process, have a generic, prioritized action plan already drafted with everything that must get done to complete the integration and realize the procurement synergies, then customize this as necessary for each deal. Again, every transaction is different – in some cases companies don’t integrate the operations of an acquired business. However assuming operational integration is in the cards, it’s important to be prepared, for if procurement synergies are factored in to business case of the acquisition, time will be your enemy from the day of closing. Most important is to organize the category buyers from your company and the acquired organization, to get them working together in a constructive way, toward a common goal, from the very beginning – This is the most important enabler to realize mutual cost reductions quickly. However don’t forget to account for other key areas of supply management including risk management, compliance, tools and systems, general terms and conditions, commodity risk management (e.g. hedging), supplier quality and development, etc. Lastly, as with any execution topic, follow-up is key. The companies that are best at integration have a well-organized process to follow-up on all integration-related activities until they are complete, which in big deals can take several years.

While these may not be entirely new to you, I hope this has got your wheels turning on the procurement challenges in M&A. What do you think? What else should Procurement watch for in a potential M&A transaction? Let me know your thoughts!

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