Are you Ready? It's Time For M&A Activity to Heat Up This Fall (Part 1)

This past week has seen a flurry of acquisition activity that I suspect is a sign of things to come. Sprint Nextel announced its intent to acquire Virgin Mobile USA. And IBM announced it was acquiring SPSS, an analytics provider. No doubt the pace of these deals -- and many others taking place around the world at the moment in different industries -- will continue to climb as companies sitting on strong balance sheets discover opportunities and undervalued assets to take advantage of. Moreover, not only is rising M&A activity during a recession a type of corporate Darwinism, it's also a signal that perhaps the toughest times are behind us, especially as companies begin to mobilize and optimize their resources and assets for an eventual upswing. But what does M&A activity in our supply base bring with it from a procurement and supply chain perspective?

In today's post, I'll offer some suggestions for reducing risk and potentially even take advantage of the M&A environment in our general supply base. Next week, in Part 2 of this series, I'll take a look at what it means for software and solution providers in particular (including how best to mitigate supply risk when a key software provider is acquired). And after that, as my additional rambles unfold, I'll take a look at potential M&A activity in our sector, handicapping the odds of who will be at the M&A table (and on which end of it and what the triggers will be). On a general level, let's kick off this discussion by examining how the M&A activity which potentially matters most to us is in our supply base -- and why this is an area that we're least likely to proactively follow and track.

Much of the M&A momentum that's currently taking place is global in nature. Take China for example. According to a recent article posted on Alibaba, "Merger and acquisition (M&A) activity went up slightly in the second quarter mainly because stimulus measures spurred business confidence while government policies encouraged consolidation in industries such as steel and financial services." But what's most interesting according to the story is that Chinese companies -- both private companies and the "Red Chips," i.e., the State owned corporations -- are the ones doing the acquiring rather than foreign companies.

In fact, Chinese companies are gobbling up many global assets just about as fast as regulators (both Chinese and foreign) will let them. This is because global acquisitions represent not only a chance to increase the Chinese business footprint -- they also represent a chance to diversify the currency risk inherent in the Chinese asset portfolio that contains so much US debt. After all, it's better to own appreciating Western assets than depreciating Western dollars.

When it comes to the procurement and supply chain perspective, the fact that Chinese companies are trying to buy foreign companies -- not to mention eating their own -- should get all of our attention. And that's because in global environments, especially, acquisitions can bring surprises that we might not learn of until after the fact. From price increases that come without warning to missed shipment to new account management contacts, global acquisitions inevitably bring hitches from a customer management perspective.

Moreover, in the case of Chinese state-controlled assets, it's more than probable that at some point -- perhaps sooner rather than later -- that Chinese domestic and foreign policy interests (e.g., domestic infrastructure or military spending) could take precedence over providing goods for export markets or even domestic consumption by global entities operating within China. As a friend once remarked, "they don't call 'em the "Red Chips" for nothing."

While I'm done picking on China for now, this specific discussion offers a good segwue to providing a checklist for companies to tick off when it comes to monitoring and actively managing M&A activity in the supply base, especially on a global basis. In no particular order, here's a laundry list of items on my list to consider in defining a supply risk monitoring program from a supply base M&A perspective:

  • Have we created a list of probable targets for acquisition in our supply base?
  • Have we tiered our suppliers based on a potential acquisition's impact?
  • Does my organization have a program in place that actively monitors for acquisition activity on both the tier one and tier two supplier levels?
  • Do we have a plan in place to execute against when a supplier is acquired?
  • If we are a minor customer to a supplier, how do we insure that we're not shunted aside or de-prioritized in relation to more important clients following an acquisition?
  • Do we have a way to rapidly update our spend visibility data (i.e, refresh) to show new parentage relationships which might allow us to take advantage of certain discounts? What is our process for making sure these discounts are realized?
  • Do we understand the supply industry dynamics to know whether or not we should approach a supplier to renegotiate a contract immediately following an acquisition versus lying low?
  • Is there potential price-based government or political risk (e.g., tax/tariff/VAT) inherent when global suppliers are acquired (as part of retaliatory or protectionist measures by governments on behalf of local producers/suppliers)?

By no means is this list complete. But hopefully it will help get you thinking about how best to prepare for acquisitions in your supply base. Next week, we'll double-click on this issue further by looking specifically at how best to prepare for M&A activity in the software market as well as which prospects might be doing the dining -- or might be on the dinner plate -- in the Spend Management market. We'll also examine the situation from an acquirer's perspective in the software market, looking at how to avoid unwanted surprises at the due diligence dinner table.

Jason Busch

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