M&A? It's all about dinosaurs and race horses
Richard Edwards
2 Comments
Is consolidation the best way for companies to survive the global economic slowdown? For the aviation industry the answer, most definitely, appears to be a resounding yes.
Just this week the UK’s flagship airline, British Airways, announced that it was in talks over a proposed merger with Spanish carrier Iberia.
Using Air France’s 2004 tie-in with Dutch airline KLM as its model, BA, and its Spanish counterpart, will doubtless be hoping that the “together we’re stronger” approach will bring rewards.
After chatting to a leading aviation analyst earlier this week, however, Procurement Leaders has some words of warning.
According to Peter Morris, analyst at aviation consultancy Ascend, consolidation is no panacea to the immense problems facing some of the world’s largest carriers.
“It depends if you’re joining up dinosaurs or race horses,” he said. “Join two dinosaurs together and all you end up with is a larger lumbering organisation. Get two race horses and you could easily produce a thoroughbred.”
So there you go – BA be warned, hurdles undoubtedly await.
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Reader Comments (2)
Integration - the moment of truth for purchasing professionals?
It is always a telling time for procurement professionals, when two or more organizations integrate and the books are opened for their respective contracts for goods and services. In our experience those organizations that have invested in best procurement practices and taken a strategic view of procurement always outshine those who have not, and typically go on to play the dominant role in the relationship.
There are three primary areas post merger to finding savings:
1. The price paid for like goods and services
2. Economies of scale
3. Differing levels of supply management effectiveness
1. Price comparison for same goods and services
a. These are the easiest and quickest savings to realize and should be done from day one. This task requires a simple contract comparison to identify:
i. Price differences
ii. Specification differences
iii. Discount structures
iv. Volume commitments
v. Terms of contract that constrain resourcing activities
vi. Other none price financial incentives/benefits
vii. Service standards
2. Increased volume
If volumes increase significantly this provides an excellent opportunity to re bid the business, to obtain improved pricing to reflect the increased spending
3. Sourcing effectiveness
There is likely to be differing levels of sourcing competence and effectiveness when two or more organizations integrate. This can be due to one organization having a superior sourcing strategy. In any case both organizations will benefit from adopting proven best practices.
Procurement must have a well structured approach to identifying, prioritizing and realizing these savings. Spend analysis is the proven best practice methodology to identifying savings. Prioritizing activities results in a plan for waves of sourcing activities and waves can be prioritized by comparing benefit with the ease of implantation for different categories. In executing these waves, it is important not to lock in the company for too long, as this may prevent later waves from realizing even larger benefits later on.
In Purchasing Practice’s experience organizations that have invested in best procurement practices and taken a strategic view of procurement always outshine those who have not, and typically go on to play the dominant role in the relationship. For more on this subject see “Inbev and Anheuser Busch - Integration Savings” by visiting http://http://purchasingpractice.com/wp-admin/post.php?action=edit&post=144 and “Procurements role in a Merger, Acquisition, or Business Integration”, by reading the May edition of “Transform” at http://purchasingpractice.com/information
IT Infrastructure, Mergers and Acquisitions, Supply Chain
It is essential to perform an assessment of the supply chain efficiency during the due diligence phase of the merger and acquisition process. The target company will probably not support the overall merger/acquisition goals.
Tip: Set up an independent M&A supply chain with full purchasing authority.
In a recent acquistion, the buyer chose to use the target company staff and processes to acquire equipment and services. During the implementation of the project, every infrastructure project manager, the program manager and work stream leader noted the ineffective supply chain and sourcing of equipment and services. Delays of 60 days were the norm. The merger teams discussed the issue and agreed the delays were rooted in cultural inertia at target company.
Establishing an efficient, idependent supply chain prior to the acquisition will ensure timely delivery of resources, equipment and services.