“According to the findings of the 2015 M&A Trends Report, an overwhelming majority of the 2,500 surveyed executives at US corporations and private equity firms expect the robust pace of mergers and acquisitions to extend–or even accelerate–in 2015. This momentum is expected across the board, in private and public businesses, in multiple industry sectors, in companies and private equity firms large, small, and in between.”
It seems like every week we’re hearing about a new merger and acquisition between two entities or one corporation acquiring another.
As a Canadian I’d never thought I’d see the day when Tim Horton’s would merge with another fast food entity, especially Burger King.
King Horton’s or Burger Tim’s? What do I call them?
Or that Tata Corporation in India would acquire the venerable British car manufacturer Jaguar. How do I react to a Tata S-Type rolling off the assembly line?
And we don’t even hear about the thousands of other mergers and acquisitions that take place every year.
We also don’t hear about the tremendous amount of planning, due diligence and negotiations that must take place for a successful merger and acquisition, or the disastrous aftermath when they don’t.
As a contracts negotiator, I’m sometimes asked to assist clients in the due diligence phase or during negotiations. However, most of the time I’m brought in once the deal has been finalized and the parties are in post-acquisition, which I like to call the “Panic” phase.
Because the morning after the ink’s dried and the two parties begin rolling up their sleeves for the real work, a third party shows up. The supplier.
And they’re usually waving around a contract with one of the party’s that says it can’t be assigned to the other party without the supplier’s consent. So they’ve shown up to give their consent…in exchange for a small fortune.
This isn’t to imply that organizations don’t conduct a thorough due diligence on the assignability of contracts during merger and acquisition.
It’s just that most organizations don’t have a good handle on where their contracts are, or what they say. Sometimes, one side will dump a pile of PDF contracts on the other and give them a small window of time to conduct their due diligence.
Other times, they’ll provide only a subset of agreements and negotiate a transition period after the acquisition, during which both sides will work together to find the rest of the agreements and execute assignments or renegotiate with suppliers as needed.
However, there are a couple of ways to engage suppliers and mitigate risk:
Due Diligence Phase
When you’re involved in the due diligence phase, you should always take the time for a thorough review of the other side’s contracts.
If the negotiation window is short, prioritize the most important or customer-facing aspects of the company being acquired and then focus on a due diligence review of any supplier agreement that could have an impact on those parts of the business.
Everything else can be given a risk factor that’s reflected in the cost of the acquisition.
When you’re in post-acquisition, take a similar approach. Prioritize suppliers that could have the most critical impact on the business and create a risk profile.
Then, based on a review of the existing contract and whether or not it’s assignable, establish the parameters of the negotiations.
There’s also a third option. Engage the suppliers during the M&A negotiations.
Depending on the criticality of the supplier, it’s sometimes better to get them under an NDA and ask for their input on how to transition from one entity to the other.
Most suppliers want long-term relationships and will work with their clients to ensure a revenue stream post-acquisition.
By working closely with key suppliers and strategic partners, organizations can greatly increase the their chances of a successful merger or acquisition.
Have you been involved in a merger or acquisition with problematic suppliers? How did you handle it?