Why procurement should have a seat at the table in any acquisition
In this episode, we talk to Jonathan Dutton, an independent management consultant with experience on both sides of the negotiating table – procurement and sales. In this podcast we discuss why involving procurement can help you ensure there is some reality around the financial metrics that are assumed to be achieved by acquisition, and why it is to your detriment to treat procurement as an after-thought in the M&A process.
Jonathan takes us through the benefits that procurement brings, its risks, and why procurement should have a seat at the table in any acquisition. Together with our host Joanna Oakey, they dive into what investors really need to do in this area, how due diligence should include a spend analysis, and why investors should strip the firm and look at usable, reclaimable assets & redeployments. They also drill into what other things procurement can offer in this area, other than just a focus on cost!
What are the business benefits investors want from an acquisition?
Are Procurement an after-thought in the M&A process?
Where do these BIG SYNERGY numbers come from exactly?
What investors really need to do
What else can procurement bring? – or is it all about cost?
The core message
THREE things to consider on the SUPPLY-SIDE prior to any acquisition
1. Cost – reducing cost of two merging cost bases is often an assumption that underpins any acquisition. All too often, ‘cost down/margin up’ is used to justify an acquisition for shareholders in the first year or two, when truthfully the drivers of the deal are more strategic and long term. So, never assume 2+2=3 when merging two cost bases. And avoid dramatic assumptions like “we’ll negotiate the cost down 10% across the board” which is a difficult target for mature spend lines. A simple desktop spend-analysis of a data-download from any P2P system (annual spend by supplier in descending order with granular data), is quick and cheap and will give you much safer assumptions on cost synergy in just a short piece of work. Include it in your due-diligence process, but use practiced procurement consultants with Power BI not accountants on Excel.
2. Stock – never assume balance sheet stock value is true. Obsolescence is always real. Stock takes are often rare and incomplete in practice, certainly over stretched supply lines into Australia. And ERPs never a panacea. Obsolete stock valued at full margin is normal – often when accountants have refused to take P&L write-downs from stockkeeper clear-outs that de-value stockholdings on that balance sheet looking for sale, or P&L’s keeping buoyant margins to look good in the shop-window. And stock held by an acquisition target may be all but useless to a larger acquiring firm; one that might be more progressive or offer more leading edge products in their market? This can be true of parts or components too. A quick ‘stock-audit’ of warehouses & a visual check (like in a supplier-analysis process by procurement) can reveal much of the truth - and be a firmer basis for M&A assumptions.
3. Supply – most organisations have a significant ‘Pareto’ on their spend patterns. Typically 80% of their spend centred on 20% of their suppliers. In fact, many firms have just 20 or 30 strategic suppliers in Australia. That is suppliers on whom you depend – ie: without them supplying you for just one week, your business (and sales) would suffer dramatically. These are suppliers we usually target with formal proactive SRM strategies (supplier relationship management). The Covid19 pandemic crisis also taught us to re-assess strategic supply lines. Is the risk of non-supply too great if we source globally to get a better price? Should we now secure supply as a strategy through local buffer-stocks, dual -v- single sourcing or buying local and re-shoring supply not off-shoring it? Where is the right balance for you to get both best-price and security-of-supply? In the crisis, regular buyers of PPE with strong SRM never went without – even from far-flung suppliers overseas.
Connect with JD
Jonathan Dutton on Linkedin
Jonathan Dutton on Twitter
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Australia’s First and Only Mergers and Acquisitions Podcast: The Deal Room podcast provides insights for professionals and businesses that are involved in sales and acquisitions activity.
Each week your host Joanna Oakey, a seasoned legal professional, interviews industry advisors and owners and managers of buying and selling organisations, to give a unique perspective of both the “sell-side” and “buy-side”.