It was to be Fred Goodwin’s finest hour – a blockbuster merger of two giants, creating a banking behemoth to break America.
Early in 2007, Royal Bank of Scotland, under the leadership of the then Sir Fred, was plotting an ambitious takeover bid for ABN Amro, the Dutch lender. A consortium comprising RBS, Fortis and Santander wanted to gobble up different chunks of ABN in the biggest-ever banking takeover. Barclays was at the table with a €67 billion offer, so RBS and its partners raised the stakes with a €71-billion bid. By October 2007, ABN’s shareholders had accepted the higher offer – around three times the bank’s book value.
Then came the credit crunch.
Just six months after the ABN deal was sealed, RBS went cap in hand to shareholders, trying to plug a giant hole in its finances. The £12-billion rights issue was the biggest the City had seen. Six months after that, taxpayers handed RBS tens of billions more as British banking was brought to its knees. RBS lost £28 billion in 2008-09, including a £20-billion write-off from its acquisition of ABN.
Clearly, not all takeover tales end with the biggest loss in British corporate history. The fall of RBS and “Fred the Shred” was at the extreme end of the scale, but nonetheless, it shows the destructive power of a merger gone wrong.
From the financial doom and gloom of the years in the wake of the banking collapse, British business has at last emerged in 2014 with reason to feel good. The last three months of 2013 were filled with positive economic signals and upbeat prophesising from even the more downbeat forecasters.
Rationalising the suppliers is critical as a company could increase its supplier footprint
Predictions of an upturn in merger and acquisition (M&A) activity have persisted for years, but a sharp revival has never really materialised. Nonetheless, figures from Dealogic, the data analyst, show that M&A deals worldwide were worth more in 2013 than in any year since 2008. Global deals worth $2.91 trillion were announced, up from $2.68 trillion in 2012 and not far off the $3.17 trillion of 2008.
This improving performance, coupled with recent good economic news, has led to some positive forecasts for M&A in 2014. A report by RR Donnelley, the printing and supply chain outsourcing company, found that 80 per cent of investment bankers believed M&A activity in 2014 would surpass 2013. “The consensus is that both strategic buyers and private equity have cash or dry powder to deploy,” the report says. “This trend, coupled with the generally improving global financial markets, will drive M&A deal-making upwards.”
However, research by Boston Consulting Group, a management consultancy, suggests that fewer than half of all mergers are successful.
If the touted sharp upturn is to finally emerge, supply chain managers need to be prepared. “A merger is never as easy as it looks on paper,” says Stephen Cooney, a director in the operational advisory team at BDO. “There should have been synergies identified during the due diligence phase; however, once the business begins to evaluate the suppliers, processes, payment terms, procurement functions and technologies, it will become clear that even the smallest difference can become a major challenge.”
The key challenges are with people, technology, operations and suppliers, Mr Cooney says. “People will be concerned with their own position and what that means for them. This will cause problems particularly with knowledge transfer. You don’t want to lose key people before capturing what’s in their head.”
Increasing value through scale, rationalising suppliers to match business needs, merging technology, understanding how different capabilities can be merged and trying to maintain a strategic focus without becoming overly reactionary are the most important elements of any supply chain merger, says Dave Hull, a senior manager in the strategic sourcing and procurement practice of KPMG.
“Scale is achieved by understanding the spend breakdown of the two companies and understanding how this can create more buying power with a supplier,” he says. “Rationalising the suppliers is critical as a company could increase its supplier footprint from, for example, 3,000 to 6,000 suppliers. Do take the suppliers on a journey with you – do not leave them in the dark. Be as open and honest with the suppliers as possible.
“As you rationalise the suppliers, you have to cope with the interim problem of increasing the number of transactions the business has to handle and process. Technology will rarely be the same between the companies and, even if they are, the business processes will be different.”
Dr Hull says that any supply chain merger does not happen overnight and will normally take six to nine months before it becomes stable.
Detailed plans should be drawn up with staff on both sides of the deal and an integration director should be appointed to lead the merger process, Stephen Rigby, head of performance improvement at Grant Thornton, advises. Board executives must agree on common goals and rewards. Good communication to everyone in the supply chain is a must. But even if it means slowing down the merger, he says, the companies must not take their eyes off the ball – at all times, business must go ahead as usual.
