Mergers, Acquisitions and Supply Chain Finance
Today we’re delighted to welcome Angus Craig from Craig Hall Consulting who shares some interesting perspectives on Mergers, acquisitions and supply chain finance.
The last year has seen some significant changes in technology and the economic environment for supply chain finance (SCF). Together, these changes will dramatically affect the SCF market. Although there will be many winners, there will also be some losers.
Purchasing Insight has been charting the changes in technology for some time. In February this year for example, Pete Loughlin observed that Taulia had automated or removed the cost of Know Your Customer (KYC) from their traditional SCF package, thereby opening up the market. In September last year he commented that Crossflow Payments offer their EDI platform for free, encouraging suppliers to switch. All of these technology changes have made the SCF proposition more compelling and have increased the number and value of transactions.
The changes in the underlying economic environment need to be viewed in two separate ways: those economic trends that encourage customers and suppliers to adopt a SCF solution and those that affect the intermediaries that offer it.
Firstly, constrained liquidity creates an environment where suppliers look for working capital beyond traditional lenders such as banks. This is fertile ground for intermediaries like SCF solution providers that has led to new market entrants such as Crossflow Payments.
Secondly, while changing economic conditions affects everyone, SCF intermediaries are likely to see a greater impact with the recent changes. There are a number of different forces at work but all stem from the credit crunch.
The bank bail-outs and financial scandals such as LIBOR have forced regulators to impose tighter controls. The banks have responded by scaling back their operations. They no longer have the resources to pursue non-core activities such as SCF. The increasing demand for financial services and the shrinking banking sector has led to the rapid growth in shadow banking, that is, non-bank financial institutions that provide services similar to traditional commercial banks. The Financial Stability Board, lead by Mark Carney, the governor of the Bank of England, reckons shadow banking account for a quarter of the global financial systems with assets of $71 trillion up from $26 trillion a decade ago. SCF offers a healthy revenue stream and rich data. This data can be used by the intermediary to develop new services or can be offered to third parties.
A lot of large companies are generating record amounts of cash and are struggling to do anything productive with it. The credit crunch combined with the euro-zone miasma has made big takeovers all but impossible. But the global economy is recovering and the euro-zone is becoming more stable so companies are starting to look outside their existing markets for better returns. The most recent of the high profile case is Pfizer’s offer for AstraZeneca. Before that there was Comcast and Time Warner Cable, Valeant and Allergen and Lafarge and Honcim. So far this year there have been 15 transactions worth more than $10bn, the most since the record M&A rush of 2007. Taking into account all M&A activity it’s up more than 50% on last year (source: Dealogic).
The acquisition of a company with a value that is significantly higher than the market value is a good result for many shareholders. No doubt there are people closely involved with companies like Crossflow Payments, Oxygen Finance, Taulia, Tradeshift, and Tungsten that would welcome the opportunity to realise their investment and become part of a larger organisation. Facebook’s recent purchase of the mobile messaging service WhatsApp for $19bn will get many salivating.
Mergers and acquisitions, however, have a mixed record of success. Jeff Bewkes, Time Warner’s current boss calls the merger with AOL the “biggest mistake in corporate history”. In the last few days, Publicis and Omnicom have perhaps had a lucky escape and called off their merger because they were unable to agree the management structure. Successful mergers need to have a strong business case and a detailed integration plan. Unfortunately, not all romances have a happy ending.