Tuesday, December 6, 2011

Divestitures, Acquisitions and Mergers - Procurements role

When you think of divestitures, acquisitions and mergers people seldom think about the role procurement can or should play in those activities. In all of these activities there will normally be a Merger & Acquisition team that leads the negotiations. There will also be a number of functional teams from all the affected disciplines that perform a number of activities in support of the transaction.

In these types of transactions one of the key activities is being able to establish the value of the transaction. These transactions are normally data intense and if you are a buyer you want to do due diligence to ensure that that data that represents accurately represents the business. If you are the seller you need to collect and prepare information for the prospective buyer’s review. If you are merging you want to see where there is synergy or disconnects between the business and areas of opportunity. Virtually all of these should involve procurement.

If you are selling a business or portion of a business, Procurement is involved in the collection of all procurement and procurement contract information to be included in a data room. In the past a secure room would be set aside where prospective buyers could view the information. Today much of the data is loaded onto a secure site on-line where the information is available for viewing but not copying. As the price of the business will be impacted by future sales of that business, with many divestitures there may be on-going commitments to purchase products or services from the acquiring company. Procurement needs to negotiate those commitments. Most divestitures will also require that all contracts that are applicable to the business being divested must be transferred to the acquiring company. This requires procurement to identifying all the contract documents that apply and then determine how they will meet that obligation. If procurement will no longer have a need for that supplier and contract, the contracts get assigned if they are assignable. If procurement determines that they will need to continue using the supplier and the contract, they can’t assign it as it would leave them without a contract. The would need to either partially assign the agrement, or go through the process of working with the supplier to create a duplicate agreement between the Supplier and the Buyer. It’s important for procurement to have terms in their agreement that will allow assignment in the event of a sale of the business that is a major user of the contract. If you don’t have the right to assign the agreement, you would need to get the supplier’s agreement or not be able to assign the agreement which could be a problem for the buyer. It’s also important to remember that in an assignment, the assigning company will remain secondarily liable under the agreement. To avoid that potential future liability you would either need to do an assignment, assumption and novation or create a duplicate agreement where you are not a party.

When procurement pulls all the information for inclusion in the data room for prospective buyers to review, procurement needs to do a number of things. First they need to review the agreements to determine whether the information is subject to confidentiality restrictions. If the document is confidential, procurement would either need to get agreement that the information can be shared, or would need to include a non-confidential summary. For agreements that can be shared, procurement needs to perform what is called “redacting” which means striking out confidential or sensitive information from what is shared. This prevents prospective buyers from using the acquisition process as a “fishing trip” to uncover information and then not follow through with the purchase.

If you are in an acquisition where you are buying a business, the procurement team plays the opposite role of being the ones that should be reviewing and analyzing all the documentation included in the data room to get a better understanding of the operation, who they do business with, what they buy, what contracts they have and how good those contracts are. You use this information to both understand where there are synergies, identify areas where there will be significant disconnect, substantial work or problems and costs. In this role any major problems or opportunities that you find need to be shared with the project team for their use in negotiating the final price to buy the business. If you do wind up buying the business, Procurement then has the significant role of making sure that all the contracts, licenses, etc. that they need to operate the business are transferred to them. They also need to assimilate all those agreements into their process, load them into their systems. They decide which agreements they want to retain or cancel. They consider which suppliers they will retain or replace with their existing suppliers. They will look at systems and information that they acquired and determine what gets retained, what is retired and what gets converted to their existing systems or whether they convert things to the systems of the company they acquired. Throughout all of this procurement needs to look at where in this combined enterprise they can cut costs, improve performance, leverage suppliers etc. If people were included as part of the acquisition, they will also organizationally look at what staffing is require for the business going forward, and where they need staff. They will look at the resources of both organizations to determine what the best team is going forward.

One of the cornerstones in being able to do a divestiture is you must have an excellent contract system. You need immediate access to information that is accurate and current. You also need all other systems to allow you to identify all things that apply to the affected business and individuals. For example, what computer hardware and what software programs do they have and can those licenses be transferred. That information needs to be stored electronically and be available by the procurement team lead to be able to pull from the system, redact and make available in the team room for review. If you don’t have those systems and discipline it makes doing a divestiture much longer, more complex. It also requires a number of additional people to be involved in the process that can have a number of potential negative impacts.

When you are considering doing a divestiture, buying a business or company. or merging with another company you want a minimal number of people involved and they need to manage the activity under strict non-disclosure requirements. The simple fact is not all potential deals come to fruition. In the interim you want everyone to behave like its business as usual and not have the fact that you are considering a transaction to become public. You don’t want customers making different buying decisions. You don’t want employees responding negatively or in fear of their job, as it may never happen. You also don’t want potential information leaked to the investment community where it would impact the purchase price.

In mergers what procurement may or may not do will depend upon the type of merger that’s involved. In a friendly merger the seller may provide all financial information and not provide other due diligence information until the financial due diligence is acceptable. Once the price and terms of the purchase are agreed, they will then involve procurement to perform their portion of due diligence in evaluating the selling entity. Unlike a divestiture or sale of a business, when there is a merger the existing company becomes part of the acquiring company so things like assigning agreements isn’t necessary. The acquiring company picks up all rights and liabilities under those agreements. The primary role of procurement in the acquiring company is to assimilate all those agreements into their process. They decide which agreements they want to retain or cancel. They consider which suppliers they will retain or replace with their existing suppliers. They will look at systems and information that they acquired and determine what gets retained, what is retired and what gets converted to their existing systems or whether they convert things to the systems of the company they acquired. Throughout all of this procurement needs to look at where in this combined enterprise they can cut costs, improve performance, leverage suppliers etc. They will also organizationally look at what staffing is require, where they need staff, etc. They will look at the resources of both organizations to determine what the best team is going forward.

In a friendly merger situation there will normally be a significant damages agreed if one company refuses to complete the merger. As long as the financials upon which the merger was based are correct, a party cannot back away from completing the merger without paying those damages. This means that once the price and the terms of the purchase are agreed, the information that is shared is usually not redacted.

In a hostile takeover, no information is shared and the acquiring company’s due diligence must be performed without the cooperation or the target company. In a hostile takeover, procurements only role would be if they were successful in the takeover the acquiring company’s procurement team would need to do the same things as would be required after the completion of a friendly merger.


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