With M&A season in full swing, there’s a new epiphany driving (and nixing) acquisitions that goes far beyond the typical high-level revenue and cost savings projections.
Market volatility is ruling today’s economy, making timely acquisitions difficult. Complicating M&A negotiations are commodity prices – like metals, oil, food, and real estate – which are trading far outside of typical ranges.
Weighing over all negotiations, though, is the economy. Companies may look cheaper than ever before, but swinging and missing on a major acquisition could be the beginning of the end for a corporation. No longer is it acceptable to base M&A recommendations off of high-level, best guess estimates of the cost savings and future revenue that might be achieved. Rather, companies need to dive a little deeper and quantify, with relative certainty, the hard savings that could be seen if an acquisition were to be completed.
How’s it being done? Executives are turning to the bread-and-butter of supply chain management: spend analysis. While spend analysis has historically been a technology and process that’s used in house, companies are now using spend analysis technologies to support M&A action and discover the hard savings opportunities and synergies of a potential acquisition.
Specifically, organizations are using four primary spend strategies to understand the outcome of a potential acquisitions.
The first is leveraging. Acquiring companies can analyze the procurement function of their acquisition prospect to identify areas where the two companies could combine volume of purchases with the same supplier. For instance, if one company is buying $3M worth of goods from Supplier A, and company B is buying $2M goods from supplier A, they can combine their purchasing to gain better supplier leverahe and reach previously unattainable volume discounts. The savings should then be added to the total value assumptions of the acquisition.
Another useful technique – normalizing. Here companies can standardize the contract terms and pricing for similar suppliers. For example, if the acquiring company buys 2,000 pieces of metal annually from Metal Manufacturer A at $1,000/piece and the acquisition target buys 2,000 of the same metals from the same company at $900/piece, at a minimum, the combined companies could buy 4.000 pieces of metal at $900/piece. Or ever better, there may be addition volume discounts that they could see by purchasing 4,000 pieces of metal instead of 2,000.
Companies are also using rationalization. This technique looks at situations where the two companies are using separate suppliers for similar items. Spend analysis technology provides the ability to easily review purchasing and contract details for both companies to identify areas to consolidate to one preferred supplier. This process requires more resources, but the overall savings created by a competitive bidding situation amongst multiple suppliers can typically be significant – and well worth the time investment.
And finally, there’s integration. Here we look at situations where the two organizations purchase different products from different suppliers. Spend analysis can enrich the data to support a form, fit and function view of the business process with the goal of identifying possible process engineering or product changes that enable standardization to a common set of items and suppliers.
There are plenty of other areas where spend analysis can be used to add value in an M&A environment, like reviewing aspects of a company’s relationship with their suppliers, such as their service levels, payment terms and risk, which can offer insight into additional savings, service and cash-flow considerations.
The reality is that today’s market is experiencing unprecedented volatility, and whether a company is looking to buy, merge or sell, it’s critical to attain full visibility into the savings opportunities of the partnering the company.