Mergers, acquisitions and divestments (MAD for short) are a constant in the business world. They’re always happening somewhere, providing methods for companies to grow and shrink. They could be strategic or opportunistic, a way to focus the business on its core strengths or simply to help it survive.
But MAD activities aren’t an everyday occurrence for a company, so detailed understanding of their intricacies is limited for most of the people involved.
Given that these activities are some of the most demanding and difficult that a company can undertake, this is a real issue.
In fact, obtaining professional advice and guidance from specialists is generally recommended, often required, for a company to have any real chance of concluding a MAD transaction that delivers anywhere near to expectations.
Note that the difficulties can be amplified if the companies involved in MAD activities use different languages for their normal business activities.
Since contracts form the foundations of business in most cases, Contract Managers have a big part to play in MAD activities.
This article provides some insights for Contract Managers, covering:
- How companies grow and shrink
- An overview of mergers, acquisitions and divestments
- MAD activity in a mad world
- The Contract Manager’s role in MAD activities
- Challenges and the role for Contract Management Software
How companies grow and shrink
Business growth comes in two flavours:
- Organic: the company expands by increasing output and enhancing sales internally, all through the use of its own resources.
- Inorganic: expansion is driven by the use of external resources obtained through mergers and acquisitions.
Shrinking as a deliberate strategy or through necessity is most often achieved through:
- Divestment: selling a non-core part of the company as a going concern.
- Liquidation: ceasing operations in a part of the company, relocating or selling off any usable assets it owns and closing it down.
- Redundancies: laying-off a portion of the workforce to reduce output and therefore sales.
Divestment is the most relevant activity for the purposes of this article.
Overview of MAD activities
Stakeholders from all parts of each company need to be involved in MAD activities. Roles, responsibilities and timing need to be established. A strong conflict resolution approach will be necessary and likely to be well used.
A merger is the process of two companies, roughly but not necessarily the same size, joining forces to operate as a single new entity. Various laws can govern how a merger operates, and various types of transaction can be used to achieve the merger.
The purpose is to achieve synergies and create value through scale, in terms of buying power, market share, competitiveness and opportunities for cost savings. The aim is to produce a combined effect greater than the sum of the individual effects of each company.
‘Joining forces’ is a vast oversimplification of what is the very complex process of combining two businesses.
In practice, a merger most often results in one company absorbing the other, with relatively minor changes to its own modus operandi. Intentions to take the best of both worlds to produce a ‘better’ organisation often get no further than the initial statement.
Merging two companies requires a comprehensive understanding of both, across every area of the companies.
This enables decisions to be made about how the new blended entity will operate, figuring out what will be kept or discarded and what will be changed or new, and assembling a detailed plan for achieving all of this so everyone involved can hit the ground running as soon as the deal is done.
Note that prior regulatory approval of the merger might be needed if it would, or be likely to, have the effect of substantially lessening competition in the market."
A recent proposed merger between Uber Eats and Grubhub is an example where expectation of regulatory scrutiny was sufficient to prevent the deal going through.
An acquisition is a company’s purchase of most or all of a public company’s assets or shares in order to gain control of it, or all of a privately held company’s assets.
The purpose is to obtain a new capability or more of an existing one. The aim is to grow the business and stay competitive through diversification or scale.
While a merger involves the blending of two companies, an acquisition is more concerned with making the target company a part of the acquirer’s business.
The acquired company may or may not retain its name, is likely to have to give up elements of independence and experience freedom from choice. It will be expected to continue to do what it does best, only better under the new ownership.
As with mergers, a great deal of information needs to be collected about the target company, to understand how it operates, determine what might need to change and how to do that, formulate the necessary plans. If necessary, regulatory approval might be needed beforehand.
Negotiations about pricing, timing, terms and conditions and so on must be conducted.
Presuming a successful purchase, there’s the paperwork to complete, regulators to be informed and a raft of other operational matters to attend to."
The degree of change required to the acquired company can vary. If it will be tightly integrated into the business, it would be expected to comply with all of its new owner’s applicable policies and processes, use standardised technologies and infrastructure, and be visibly identified as part of the acquiring company.
At the other end of the scale, the acquired company may operate with a high degree of autonomy under its own branding and operate as before with little change other than adherence to certain of the owner’s policies and infrastructure requirements.
The amount of work needed to bed down an acquisition varies, but as a guide can be considered roughly inversely proportional to the level of autonomy it will be granted.
Changes will also be required to the acquirer’s financials, business processes and other areas to account for the presence of the acquired company.
A divestment is the sale of a non-core part of a company. It’s the other side of the acquisition discussed above.
The purpose is to generate revenue to be used elsewhere in the business. The aim is to allow a sharper focus on the remaining core business."
A divestment is much less complex than an acquisition, but still requires a considerable effort.
All the information that a prospective buyer is likely to want needs to be collected, collated and categorised. Confidentiality agreements need to be arranged and signed. Explanations provided. Pricing haggled. Terms and conditions and timing agreed.
The sale might be conditional on measures being taken by the seller to ensure that the target company is sold as a going concern. This might mean that it continues to use the seller’s operational environment in some fashion for a period to allow the buyer time to prepare for a transfer to its own environment.
Every element of the seller’s operational environment that is involved needs to be identified and appropriate measures designed.
Presuming a successful sale, there’s the paperwork to complete, regulators to be informed and all those other legal things to be done, plus activation of any temporary measures providing ongoing access to the seller’s environment."
Changes will also be required to the divestor’s financials, business processes and other areas to account for the sale of the acquired company.
MAD activity in a mad world
A buoyant economy is more conducive to MAD activity than otherwise, because there’s generally plenty of cash and confidence about. When the economic tide turns, there’s generally a significant drop in those activities.
Currently, there’s a lot of shrinking going on in a world gone mad due to the effects of COVID-19 and the efforts made to deal with it. Much of any planned growth has been shelved as survival has taken centre stage. And that has created opportunity for others.
Some companies will have prudently built up a significant war-chest during the last decade’s good times and are well-positioned to take advantage of these hard times.
Bargain-basement, fire-sale type prices might well be obtained for quality companies that are struggling. Having cashed-up owners will not only give such companies a new lease on life, it should enable them to create significant growth for their owners when the good times roll again. And they will, though probably not soon.
The Contract Manager’s role in MAD activities
Like every other functional specialist in a company, the Contract Manager’s role will vary according to the nature of the business transaction their company is engaging in, and the strategy adopted for that transaction.
In any merger there’s a wide range of activities that should or might be performed by Contract Managers, depending on local laws, the intended shape of the merged entity and how it will be constructed.
A sample of the activities each company’s Contract Managers may need to work on, and that occur either before or after execution of the merger paperwork, covers:
Pre-merger preparation, including:
1. Information sharing:
- The Contract Management function, including at least:
- Team size and composition
- Team and individual KPIs and measurements
- Operating policies and methods
- Processes in place
- Technologies used
- Workflows in force
- The number of active contracts (buy and sell)
- The number of active suppliers and customers under contract
- The total annual spend with contracted suppliers
- The total annual revenue received from contracted customers
- The top 20 suppliers by annual spend, showing how much is spent on what categories of products and services acquired
- The top 20 customers by annual revenue, showing how much is received for what categories of products and services purchased
- The average monthly number of new contracts, renewals, terminations and amendments in the 12 months pre-COVID-19 and since
- A list of the various languages used in contracts, with rough estimates of the number of contracts for each and those written in dual languages
- Contracts with potentially problematic clauses, such as:
- Assignment limitations
- Change of control consequences
- Contract usage limits
- Early termination for convenience restrictions and fees
- Governing Law either not stated or considered ‘difficult’
- Notice requirements
- Ownership transfer limitations
- Supplier exclusivity
- The same products and services
- Different products and services
- Identification of contracts requiring critical attention pre-merger, such as deadlines for a notice to a supplier about contract renewal or termination intentions
- Assessment of both sides’ contracts containing potentially problematic clauses to determine actual level of risk
- Comparison of each side’s:
- Contract Management function, highlighting key differences
- Contract inventory details, highlighting scale
- Contracts with common suppliers providing the same products and services, highlighting consolidation opportunities
- Key and important contracts to determine any commonality of assignment of each classification
- Methods and a schedule for dealing with problematic contract clauses
- Identification of quick wins, such as areas where combined buying power can deliver immediate savings, where redundant activities can be immediately discarded to save time and effort, where one company’s approach to something is clearly superior to the other’s and can be adopted and scaled with minimal effort
- A schedule for obtaining directions about addressing critical contract events occurring pre-merger and implementing those directions
- A proposal for improving the operating model design of the Contract Management function
- An approach for achieving synergies from common suppliers
- Address critical contract events occurring pre-merger in accordance with the schedule
- Develop plans for achieving identified quick wins on post-merger Day 1
- Negotiate updates to contracts with problematic clauses
- Consolidate obligation compliance measuring and reporting methods for each side’s key and important contracts.
Acquisitions can be complicated when the target company uses its owner’s shared systems environment, and the buyer wants to acquire a going concern. Such systems may be neither available in the buyer’s environment nor readily obtainable.
In such cases, continued use of those systems by the target company can continue under a transition service agreement with the seller.
These agreements can be created to allow the buyer time to arrange for the use of its existing contracts for equivalent products and services or to organise new contracts.
The activities a Contract Manager might undertake for an acquisition can look similar to those for a merger.
In many respects an acquisition can be treated like a mini-merger, especially if the target company is to be fully integrated into the buyer’s organisation rather than bolted-on as a standalone subsidiary."
Ultimately, it is the buyer’s intentions about the level of integration of the target company that drives what activities are needed.
A sample of the activities the buyer’s Contract Managers may work on with respect to the target company, and that need to occur either before or after execution of the acquisition paperwork, covers:
Pre-acquisition preparation, including:
- Same as Pre-merger preparation (1) Information sharing
- Same as Pre-merger preparation (2) Discovery
- Details of any products and services used on a shared services basis by the target company via the seller’s contracts that cannot be taken over by the buyer, such as software, outsourced business processes like payroll, and data communications services
- Same as Pre-merger preparation (3) Analysis
- Evaluation of whether or not the buyer has contracts in place to provide the products and services the target company obtains via the seller’s contracts
3. Recommendations: same as Pre-merger preparation (4) Recommendations
4. Actions: same as Pre-merger preparation (5) Actions
Post-acquisition integration, including:
1. Operational change management: same as Post-merger integration (1) Operational change management
2. Contract change management:
- Same as Post-merger integration (2) Contract change management
- Ensure the target company can participate in the buyer’s contracts
- Arrange any new contracts for the products and services the target company uses on the basis of a transition services agreement with the seller.
A business can unilaterally decide to sell all or part of itself, it may be approached by third parties to determine its interest in selling, or the sale might be demanded by a regulator or a court.
A divestment can be quite complex but relatively simple compared to a merger or an acquisition."
A sample of the activities the seller’s Contract Managers may need to work on with respect to the target company, and that occur either before or after execution of the divestment paperwork, covers:
Pre-divestment preparation, including:
1. Collection, collation and release:
- Same as Pre-merger preparation (1) Information sharing
- Same as Pre-merger preparation (2) Discovery
- Details of any products and services used on a shared services basis by the target company via the seller’s contracts that cannot be taken over by the buyer
- Prepare and negotiate any draft transition service agreements allowing the divested company to temporarily continue to use the seller’s shared systems environment
Post-divestment preparation, including:
1. Operational change management
- Deal with the decrease in the number of key and important contracts under active management, covering areas like key date management, performance measurement, statutory compliance reporting and risk management
- Update registers containing details of contract risks and issues, supplier and customer issues, NDAs and so on to remove references to divested contracts
- Update contract event calendars to remove references to divested and terminated contracts
2. Contract change management
- Assign divestible contracts to the buyer
- Finalise and execute any transition service agreements, then track and manage until concluded
- Terminate any contracts no longer needed, as soon as practicable
- Negotiate out-of-cycle decreases to contracted commitments
- Work with other business functions to identify and implement changes in their contracts that might have become necessary following the divestment
- Update details of contract and obligation owners, contract approvers and signers
- Track and report progress
Challenges and the role for Contract Management Software
Depending on their scale, scope and complexity, mergers, acquisitions and divestments can have many moving parts needing coordination in order to have a chance of achieving the desired outcomes in the desired timeframe. That coordination needs to be within and between all the companies involved.
Every business function is likely to be involved, usually in a relatively limited way during the preparation stage but more broadly during the integration or separation stage."
Because of the depth and extent of contract-related information needed to conduct a MAD activity, a Contract Manager involved in those activities will almost certainly face a hard time in situations such as:
- Either or both companies’ Contract Management function is non-existent, highly localised or poorly resourced, with no centralised repository providing visibility of all contracts
- Searching through any available contract documents for relevant information must be performed manually
- People with the required knowledge about a company’s contracts are no longer available or readily accessible
- Details of obligations and compliance performance are not tracked, reported or remedied
- Contracts are not categorised by importance or other traits, key dates are not recorded and ownership is not tracked.
Fortunately, the risks and challenges associated with all these particular situations can be mitigated with the use of dedicated contract management software.
The creation of a central, searchable repository of contracts complete with a full audit trail of previous activities can go a long way to reducing the manual workload for contract managers prior to, during and after a MAD transaction."
Furthermore, these benefits are not merely confined to coincide with these specific transactions. This technology supports superior contract management on an ongoing basis - helping to embed good disciplines and keeping the information secure yet accessible at all times.
Involvement in any MAD activities and their need for accurate information can and often will expose every dysfunctional and sub-optimal aspect, as well as the strengths, of the Contract Management function. This is because those activities tend to pressure-test most if not all of its capabilities in a compressed, high-intensity timeframe.
However, this is valuable information. Improvements can be made over time to increase the effectiveness of the function for day-to-day operations, as well as making it better able to cope with any future MAD activities.
There’s not really any distinct way Contract Managers can prepare exclusively for the eventuality of a MAD transaction. It’s just as well, because there’s no need to, particularly as it may never happen.
The nature of contract-related information needed for MAD activities closely matches that required to support an effective and efficient Contract Management function."
This means that the best preparation for any MAD activity lies in the development of the process, technological and personal capabilities necessary to provide that information for day-to-day business-as-usual Contract Management purposes. The end provides the means with respect to handling MAD activities.
If you would like more information about the Contract Manager’s role in mergers, acquisitions and divestments, or how Gatekeeper can assist with those activities, then contact us today.