One of the supplier management trends in 2013 we identified in an our earlier blog is the ability for organizations to manage their suppliers based on anticipated corporate changes in the form of Divestitures (e.g. spin-offs – non-taxbale, equity carve outs – taxable) or M&A (mergers and acquisitions).
While these have different start and end points, all have something in common – the goal of improving profits and productivity, and increasing shareholder value. But after the restructuring is done on paper, the impacts on third party relationships can be damaging if these new structures do not provide an understanding third party related processes and data, critical to the long-term success of the corporate change.
Recent Corporate Activity
If you look back at recent types of corporate activities, the economic downturn of 2008/2009 has led to an expanding divestiture market. In fact, according to a Deloitte survey of 304 professionals in late 2010, divestiture volume increased three percent to more than 12,500 deals. According to Chicago based Spin-Off Advisors LLC, the 2011 value of U.S. spinoffs was $90.01B more than double 2010’s total. Further still, according to an article published in June 2012 by Ernst & Young LLP, the number of divestitures was on the rise, with 34 percent of respondents expecting to execute a divestiture over the next 12 months, a 70% increase from April 2010.
Strong corporate divestiture activity in 2011 was driven by a sharp increase in spin-offs and carve-outs. This has continued through the end of 2012. However, recent research from The World in 2013 by the Economist noted that the 500 biggest American companies are sitting on $1 trillion in cash. Based on the ongoing aversion to risk, they actually predict banks and corporations will put their capital to work through merger and acquisition, and perhaps begin the resurgence of global corporate conglomerates that were dominant in the 60’s and 70’s.
It is unclear which way things this activity will go in 2013, but if we look at recent examples of corporate restructuring we can see how there are vastly different drivers for the corporate restructuring activity. Three noteworthy brands that involved in corporate restructuring in 2012 were Kraft, AIG and Hertz, each with a slightly different spin (no pun intended).
- For instance Kraft decided to spin off a part of its business that houses renowned brands, including Oreo, Cadbury and Nabisco. Shareholders of Kraft (KFT) received one share of the new Kraft Foods Group for every three shares of KFT owned. The new grocery company now trades under the ticker ‘KRFT’ and post-spin, Mondelez International will trade under the ticker ‘MDLZ’.
- AIG noted that it will sell 80 percent of its International Lease Finance Corp. to a group of Chinese investors for $4.23 billion. AIG used proceeds to pay down debts on a Federal Reserve credit line and repurchase shares from the Government helping recoup the insurer’s $182.3 billion bailout with a profit.
- Finally still another dynamic is that a divestiture may be happening as a result of a give and take for an acquisition based on concerns to preserve competition. Consider the recent The Federal Trade Commission FTC) which requires divestitures in order for approval of Hertz’s proposed $2.3 billion acquisition of Dollar Thrifty.
With hindsight being 20/20, studies suggest that the recalibration of corporate legal entities can have a drastic postivie affect on senior executives, labor force, shareholders, and not least of all suppliers. What’s clear is that these activities are not always successful, with more failures definitely leaning towards M&A in particular. Just think of AOL/Time Warner or Daimler Chrysler (I mean… who thought these were a good idea? 🙂.
Adding the Supplier Management considerations
The success of mergers, acquisitions, takeovers and divestitures is determined by a number of factors that differ from each other. What is consistent is the constant “ebb and flow” of corporate mindsets to look for generating positive cash flow, putting tremendous pressures on those responsible for managing the “after math”. In this regard, managing corporate restructuring requires proper planning to understand how supply base management professionals can better set the objectives and evaluate the processes used to meet the expectations of the structural corporate changes at hand. For instance, in the case with divestitures, the increased use of enterprise platforms and use of shared services (particularly in procurement) may make it difficult to carve out stand-alone units for managing processes like supplier on-boarding, supplier management, performance or even risk mapping. For M&A of course, it’s the opposite – the concern here is: what’s the overlap and redundancy that results from the new combined entities, and the understanding of what’s unique versus what can be now be shared?
To avoid the supply base disruption, companies should consider approaches that can provide deeper insights into their entire supply based on how the new or separate entities will need to manage those suppliers. What it all boils down to is understanding your data, where it resides, what data may be missing and the process for how this data is currently being managed. So as 2013 begins, consider the following for M&A and Divestiture questions that should be top-of mind for those corporate executives and managers in process of executing a corporate restructuring event –
Questions that should be asked
Corporate Restructuring (M&A and Divestiture) –
- Is all relevant supplier data tied directly to the actual supplier relationship (buyer(s), products, etc.)?
- What efforts have been made with regard to a post-event supplier management environment and its degree of disruption on the supply base?
- What types of communication have gone out to the entire supply base notifying them of the corporate changes ahead?
- How tied are IT systems related to supplier information and the various business units that will be affected by the corporate restructuring?
- Has a system assessment project been established that identifies where supplier information resides and a timeframe for eventually separating this data?
- Given the slew of ERP and other system holding supplier data, what type of due diligence has gone into the scrubbing or carving out of data to ensure supply chains are or can become independent?
- Will some suppliers be shared over time in the event of the usage of shared services in certain spend categories related to procurement?
- What is the on-going reliance on IT for managing suppliers from the parent in the new divested entity, and if so, what’s the plan to divest this reliance in the future?
Merger & Acquisition –
- Has an assessment been completed that addresses the potential duplication and overlap of existing suppliers from the various supply bases coming together?
- Can domestic or international compliance requirements be easily managed with existing systems in the event new ones are needed based on acquired entities and their respective supply chains?
- Have monetary cost be estimated based on the stress placed on internal resources for managing the new day-to-day business and IT processes related to managing the supply base of the combined entities?
- Can running risk assessments against potential new suppliers be conducted before the merger/acquisition event?
Which type of corporate restructuring will become dominant is hard to tell. However, regardless of type, the one constant is that proper planning and due diligence is essential for maintaining supplier relationships. At HICX Solutions, our view is that current systems haven’t protected you from these items (due to data modeling restrictions); however, supplier management systems that can actually model your organization should be considered as critical tool if/when corporate restructure becomes imminent.
In our next segment on supplier management trends in 2013, we will look at changing definition of sustainability and what this means to supplier management.
Deloitte Study reference
The Economist reference