Buyers respond to merger frenzy with consortium-level cloutDate: 12/10/2015
As 2015 draws to a close, the purchasing world is a little smaller than it was a year ago. Consolidation is sending shockwaves through the profession.
Not since 2007 (the most robust year in a quarter century) have the levels of mergers and acquisitions been so brisk – 40,000 worldwide by early fall, according to the Institute of Mergers, Acquisitions & Alliances.
Among the headline grabbers …
- Pfizer and Allergan, two pharmaceutical giants whose recently approved marriage will create a $160 billion behemoth in the industry.
- Walgreens’ $17.2 billion purchase of Rite-Aid, which if approved, would jettison Walgreens to the top spot over rival CVS.
- And one which many CPOs are eying closely – the planned merger of Staples and Office Depot, which would effectively make Staples the only major national office supplier in the country.
It is a trend Wall Street analysts predicted in 2008, as Bloomberg Business recently noted, “after the air was sucked from the merger market.”
Yet for all the hoopla and career uprooting these mergers have inflicted on American business, some observers assert many have done more harm than good.
A Harvard Business Review analysis in March 2011 noted many CEOs thirsting to boost corporate performance had begun lusting to acquire competitors – endeavors which inevitably ended in 70-90% failures. A year later, Forbes noted the overall success rate at about 50%.
“Mergers are sometimes done to enhance a larger firm’s capabilities,” notes Mark Trowbridge, principal, Strategic Procurement Solutions, LLC. “But other times, mergers are done for one firm to lock in the sales volume from another. These motives make a difference in the outcome – for employees, customers, and suppliers.” Trowbridge points to SAP buying Ariba or Oracle buying PeopleSoft as recent examples, adding, “Oracle didn’t need PeopleSoft’s products. It already had one of the world’s leading ERP system.”
It remains to be seen if the Staples merger will earn the Fed’s blessings. The two firms “attempted it unsuccessfully more than a decade ago when there were five major national office supply players in the country,” Trowbridge tells us. “And if that merger was turned down for antitrust concerns when there were three other strong players, I’ll be surprised if the government will allow a much-larger Staples and Office Depot to merge without strong competition to remain.”
Moreover, while mergers often provide opportunities to create an optimal supply management organization, statistics are now showing a majority are falling short of shareholder expectations, says Trowbridge, who recently lectured on M&As to purchasing audiences, and has been personally engaged in at least 15 corporate reorganizations involving banks, airlines and others, including one hostile takeover and five venture capital funded launches.
And despite their inherent ability to streamline internal business units, including purchasing organizations, promised efficiencies often don’t materialize. “This is the reality of mergers,” Trowbridge adds. “It’s one of the false assumptions of M&As.” He calls upon an example just a few years back, after Staples acquired Corporate Express, then the fourth largest national player. Executives told shareholders the combined purchasing volume of both companies would reduce costs for both sets of shareholders in the deal. “The reality was that both firms, being among the largest retailers in the country, were already buying at the lowest possible price,” Trowbridge notes. “They predicted a measurable decrease in costs on everything they were buying”. But Trowbridge’s conversations a year after the merger with senior contacts from the two firms indicated that many of those cost reductions didn’t come about.
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