MERGERS & ACQUISITIONS (M&A)
Mergers and Acquisitions (M&A) are a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. The term M&A also refers to the desks at financial institutions that deal in such activity. The terms “mergers” and “acquisitions” are often used interchangeably, although, they hold slightly different meanings. When one company takes over another entity, and establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer absorbs the business, and the buyer’s stock continues to be traded, while the target company’s stock ceases to trade. On the other hand, a merger describes two firms of approximately the same size, who join forces to move forward as a single new entity, rather than remain separately owned and operated. This action is known as a “merger of equals.” Both companies’ stocks are surrendered, and new company stock is issued in its place. (Investopedia)
Although Mergers & Acquisitions (M&A) are an integral part of conducting business, an outsourcing contract for IT services brings together two different processes and cultures can also be looked upon as bringing similar understanding between companies. RREVENU concentrates on the sourcing, procurement, and contracts that will make up the new arrangement. One of the most difficult tasks undertaken during such agreements is to bring together two cultures which means different ways of conducting business thus, new set of applications, SOPs, vendors, processes, and so forth. RREVENU specializes in looking at the Big Picture in order to look at both sets of processes and tools and come up with solutions that lead to economies of scale in sourcing and procurement thus, cost savings. In accordance, economies of scale in procurement refers to reductions in unit cost as an organization’s scale of output increases.
Deborah Abrams Kaplan wrote a great article in Supply Chain Dive titled How to navigate procurement in a post-merger world. The article highlights the following “Doing a good job merging procurement departments can mean the difference between the merged company’s financial success and failure. “Procurement is always looking for scale,” Peter Bolstorff, EVP of corporate development for the Association for Supply Chain Management (ASCM). Increased volume of shared materials makes it easier to negotiate better deals. For manufacturing companies, procured goods and services typically represent 60-80% of the company’s total costs, said Efficio Consulting COO and co-founder Alex Klein. Procurement costs are also substantial for services companies like banks, where an estimated 30-40% of spending is related to procurement, often in areas of indirect spend like IT, marketing, logistics and office supplies. “Procurement will represent a large proportion of post-integration cost savings,” Klein said.”
Several trends to look closely at in 2019 and 2020 concerning M&A are as follow:
- With the Federal Reserve cutting interest rates in 2019, this will increase liquidity driven acquisition demands. The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings during the year and other meetings as needed. Meeting calendars, statements, and minutes (2014-2019)
- Trade “wars” with China and the European Union (EU), although, the talks are ongoing, businesses will need to make projections and adjustments depending on the future outcome with such important trading partners. In accordance, trade wars will affect valuations of the companies, therefore, bring in more uncertainty in the Stock Markets however, overall the Stock Markets have been resilient so far in 2019.
- The signing of the new NAFTA deal called United States–Mexico–Canada Agreement (USMCA) however, this trade deals will still need to be ratified by both chambers in Congress: The House of Representatives and the Senate. A set of Fact Sheets are available through the Office of the United States Trade Representative, Executive Office of the President: The United States, Mexico, and Canada have reached an agreement to modernize the 24-year-old NAFTA into a 21st century, high-standard agreement. The new United States-Mexico-Canada Agreement (USMCA) will support mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America.
- The road to and the upcoming US Presidential Election in 2020 will be a rollercoaster in politics.
- President Trump’s preference in Bilateral Agreements over Multilateral Agreements such as the ongoing trade negotiations with Japan and pulling out of the Trans-Pacific Partnership (TPP).
- A new Brexit deal between the European Union (EU) and the United Kingdom (UK). Once a deal is reached, it will still need the approval of both the UK and European parliaments. Upon exit, this will certainly open the doors for a bilateral agreement between the US and UK as hinted by the Trump Administration.
- Ongoing hostilities in the Middle East (ME). Although, the US became the world’s biggest overall energy producer in 2012 and became the largest producer of oil in 2018, putting out over 15 million barrels a day, compared to Saudi’s 12 million barrels, ongoing hostilities within the ME will affect the rest of the world economy and important trading partners to the US.
- Mega deal in the making, the Saudi Arabian National Oil Company, Saudi Aramco IPO. Recently, Saudi Aramco, divulging its finances for the first time, revealed that it is the world’s most profitable company. The Saudi oil company made $111 billion in 2018, according to a note from Moody’s. According to Business Insider, Aramco officials have suggested the company could be worth as much as $2 trillion in the past. If Aramco were to list 5% of its shares at a $2 trillion valuation, it could raise as much $100 billion through the offering. That’s four times the largest IPO in history. According to Bloomberg, Aramco has hired about 25 institutions to sell the stock. Many bankers have spent years wooing officials to get a lucrative spot on the listing, making intense pitches multiple times to Aramco executives and maintaining ties even as it was delayed. While the selection of firms such as HSBC Holdings Plc and JPMorgan Chase & Co. which have long dominated deal making in the kingdom was expected, other mandates were more surprising and highlight how personal relationships and loyalty matter more than ever. Other banks involved include; Bank of America, Morgan Stanley, Moelis, Citigroup, Credit Suisse Group AG, and of course Goldman Sachs which has secured the top role in this deal.
- Tax Code; President Trump signed the “Tax Cuts and Jobs Act” into law on Dec. 22., 2017. According to Investopedia; for the banks and other corporations, the tax reform package can be considered a lopsided victory given its significant and permanent tax cuts to corporate profits, investment income, estate tax, and more. Financial services companies stand to see huge gains based on the new, lower corporate rate (21%) as well as preferable tax treatment of pass-through companies. Some banks have said that their effective tax rate will drop under 21%. The small business tax rate for 2019 is a flat 21% for a C-corporation. On average, the effective small business tax rate is 19.8%. This is a significant advantage for businesses with the lower corporate tax rate, this will surely ignite an emergence in Mergers & Acquisitions between corporations.
A 2018 study conducted at Texas Tech University, Can Deal Failure Be Predicted? found that business value creation and destruction due to M&A transactions are affected by a wide range of predictable and unpredictable factors. But in a world where an estimated 50% of all mergers result in financial disaster, it’s crucial to pursue every potential strategy supporting a healthy, successful merger.
The benefits of prioritizing procurement in acquisitions cannot be overemphasized. Procurement departments often have a broader, deeper view of their parent companies than other business units do, and that perspective can help merging companies avoid pitfalls and seize opportunities. With the right software solution and buy-in from key decision-makers, procurement leaders can practice more effective project management and boost procurement synergies significantly. This is precisely why RREVENU was created to assist our clients through the maze of uncertainties, especially regarding to Mergers & Acquisitions (M&A).
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