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).
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) -
Divestiture -
Merger & Acquisition -
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.
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Sources:
Deloitte Study reference
http://www.big4.com/news/deloitte-more-than-two-thirds-of-companies-planning-divestitures-by-2013/
Ernst & Young LLP reference
http://www.ey.com/Publication/vwLUAssets/The_Deal_Pipeline_-_Rethinking_the_role_of_the_divestiture/$FILE/The_Deal_Pipeline-Rethinking_Divestiture.pdf
The Economist reference
http://www.economist.com/theworldin/2013