To survive a merger you need to stay FLOAT

Posted by Richard Ding in Excello Law Blogs on Friday, September 21st, 2018

There is a hive of mergers happening in the world today. Currently, two prominent mergers are taking place in Europe. One is the Siemens-Alstom merger with combined revenues of €15.3 billion[1]. The other is the ThyssenKrupp-TATA steel merger with combined revenues of €15 billion and expected to produce annual synergies of up to €600 million[2].

In any merger, there are several key points which procurement and supply chain professionals would need to consider. The following equation adheres to the simple logic that Commercial considerations should be determined by Financial, Legal, Operational, Accounting, and Taxation aspects. In short: C = f {FLOAT}.

Commercial Considerations

Two entities coming together could bring value in the arrangements with your suppliers and you could get values and benefits that as a smaller organization could not. Create a plan (or even a GANTT chart) to manage the impact of the merger on your business after looking at the FLOAT factors below.

Financial

All your current procurement and supply chain matters have to be reviewed and looked at. Pricing, quantities, qualities and margins can be relooked based on possibly increased demands and orders being placed. There could be some savings in procurement for the benefit of the business as you could benefit from a higher bulk discount or better hedging for your forward contracts. Get finance in to work on helping you crunch numbers to see your savings.

Legal

Get the legal team in to look at all the existing contracts and arrangements. The risk is early termination due to mergers and there could be a need to get pre-approvals from suppliers to transfer (novate or assign) the contracts to the merged entity or new operating companies.

Operational

This is probably the biggest point. Operationally, there will be significant challenges on your end-to-end processes and procedures. You will have to merge 2 different business practices, 2 different work ethos, 2 different sets of experienced people and coordinating all of them to work together. This is a massive task. You may need to modify internal arrangements, reporting lines, logistics systems and your IT systems. There will be changes you need to manage and you need to manage changes well. The most common problem is due to the 2 different work ethos, the team that works together will conflict in dealing with matters. They need a way to resolve it. Don’t expect overnight changes. It’s a process and will take time.

Accounting

Accounting wise, there could be some changes due to different accounting practices and standards being used. Check with accounts to get your business in line so that your accounting is straight and you do not take an accounting hit.

Taxation

The taxation issues would not be the same anymore. You have certain issues that would remain – like customs duties but some others could change. Work with your tax team to make sure that your arrangements are tax efficient and that you get the full benefit of taxation treaties and laws.

Conclusion

A merger no matter how large or small is a drastic change in a business. Remember that to survive a merger, you need to stay FLOAT.

[1] https://www.dw.com/en/siemens-and-alstom-sign-rail-merger-deal-to-compete-with-china/a-43113411

[2] https://www.ft.com/content/4504f0b4-9dc6-11e7-9a86-4d5a475ba4c5

Abridged version published in Supply Management – 7 September

 

This article was written by Richard Ding
Richard Ding

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