Mergers & Acquisitions: Monitoring & Managing Supplier Risk
Written by Dilip N
[fusion_text]During the first half and the beginning of second half of 2018, Mergers & Acquisitions (M&A) were on the rise among suppliers with the end objective of acquiring new business models, increasing market share and plant size, geographic expansion, diversifying product and services, gaining market power, increasing talent pool and customer base, getting the know-how of new technologies, and to enjoy the benefits of economies of scale.
Growth through acquisitions is at times less costly, faster, and a less risky way than the traditional growth methods accomplished through expanded sales and marketing efforts. However, the benefits are led by a multitude of risks. A lot of mergers have gone wrong in the past and have faced adverse effects. Dissimilar operational practices between companies are a huge concern for the acquiring businesses, as both companies may not have the same standards for data management, policies, cybersecurity, and thus exposing companies to data compromise, fines, loss of trust with customers, and difficulties during integration.
Let us look at some of the most important pros and cons of M&As.
- Improved economies of scale: Costs can be reduced by being able to purchase raw materials in larger quantities.
- Increased market share: When two companies are in the same industry, an acquisition brings resources together and quickly builds market presence for a company by increasing market share.
- Increased distribution capabilities: Through geographic expansion, a company can add to its distribution network or expand its geographic service area.
- Acquiring new labor talent and intellectual property: For many companies, the acquisition of an organization’s intellectual property is the quickest way to market dominance.
- Enhanced financial resources: Financial capacity of two companies is usually greater than one, making new investments easy.
- New resources and competencies: A company can quickly acquire resources and core competencies not currently held by it. It also gains instant access into new product lines, markets, and existing client base. In addition, costs and risks of developing new products can drop significantly.
- Easier market entry: A new market entry can at times be expensive, comprising market research and other expenses, and takes a long time to build a compelling client base. Acquiring an existing firm can generally overcome previously challenging market entry barriers while also reducing risks of adverse competitive reactions.
- Substantial costs & financial fallout: The cost of acquisition under some circumstances can increase steeply. Returns might not benefit shareholders to the expected level, and the foreseen cost savings may never unfold or may take too much time to unfold due to various factors. These might comprise of higher than expected acquisition price, long timeframe involved in the acquisition process, losing of key management personnel, losing of key customers, and other unexpected circumstances.
- Integration issues: Company cultural clashes may emerge and activities of the previous organization might not sync as well as anticipated when forming the newly combined organization.
- Unrelated diversification and distraction from operations: While an acquisition brings along diverse service or product lines, there might be difficulties in managing competencies and resources. Time taken to address such issues may diminish much of the value otherwise brought about by the acquisition.
- Lay off of employees: An organization might lose a lot of employees during an M&A. Failure to gauge the strengths of its employees leads organizations to lay off the wrong people.
- Legal Risks: There are various regulations and laws that organizations need to comply with during M&As. Failure to do so lead to legal actions by governing bodies. Wage and hour laws should also be complied relating to termination of employees.
Some of the Major M&As During 2018
- In August, Cisco announced plans to buy security and authentication cloud services provider Duo Security for US$2.35 B. Cisco’s purchase of Duo Security should bolster its efforts in the security market.
- In July, Atos entered into a definitive merger agreement to be acquired by Atos S.E. in an all-cash transaction valued at approximately US$3.57 B. The transaction is expected to close during the second half of 2018. However, many shareholders of Syntel filed a class action lawsuit against the company’s board of directors over possible breaches of fiduciary duty and other violations of law. This might affect the acquisition going forward.
- In June, Northrop Grumman completed its acquisition of aerospace and defense company Orbital ATK for US$7.8 B. The merger would allow the security, logistics, autonomous and cyber expertise at Northrop Grumman to blend well with Orbital’s aerospace and defense prowess.
- In May, Investment firm KKR confirmed plans to buy BMC Software for ~US$8.3 B. The acquisition is expected to close in the third quarter of 2018. The acquisition is materializing at a period when software companies are reconstructing themselves to focus on higher margin businesses such as cyber security, cloud computing, and data analytics to counter a decline in their core businesses.
- In April, ION Investment Group agreed to acquire its UK rival Fidessa in a deal worth ~US$2.1 B. Fidessa withdrew the acquisition deal with Temenos Group after receiving an 8.5% higher bid from Ion Investment Group.
- In January, Xerox announced plans to merge with Fuji Xerox. Post the announcement, Xerox’s third largest shareholder, Darwin Deason filed a lawsuit saying that the deal undervalued Xerox and called for the termination of the Fuji Xerox joint venture. In May, Xerox announced that its terminating its agreement with Fujifilm and entered into a new settlement with Xerox’s top shareholders Icahn and Deason. Following which, in June, Fujifilm Holdings filed a US$1 B lawsuit against Xerox alleging that the company breached its contract by terminating the proposed merger.
Minimizing Supplier Risk During and Post M&A
It is pivotal that decision makers take all aspects into account, regardless the reason for the M&A. Acquiring companies involves several risks that must be cautiously accounted and evaluated through due diligence. Due diligence should address internal and external factors that create risk in the acquisition and focus on key factors driving profitability – processes, employees, patents, etc.
Often M&A failures are due to buyers concentrating too much on cost synergies and losing focus to increase revenues. Retention of clients is at significant risk post a M&A. It is important that the acquiring organization quickly assures clients that service levels will equal or exceed what they have been receiving. It is very important to have a post-acquisition plan, with as much details as possible.
In order to managing records and information and increasing compliance requires experience and know-how beyond the internal dimensions of organizations. Combined efforts inside the company and service providers that can deliver better methodologies, technology tools, expertise will help in mitigating risks, assisting in cost reduction, and helping create a successful organization.
Whether the anticipated impacts of a merger or acquisition are positive or negative, it is important to remember that any change in a supplier’s business operation is a trigger to assess the situation at hand. Subscribe to Supply WisdomSM Supplier Risk Monitoring to get real-time alerts and analyst guidance about potential impact to your business arising from a supplier’s merger or acquisition. Contact us for more information or to get started with a free trial.[/fusion_text]