Theresa May’s crackdown on M&A ‘Asset-Strippers’ and the importance of Procurement

Theresa May’s crackdown on M&A ‘Asset-Strippers’ and the importance of Procurement

Jack Greenwood Blog, M&A, Private Equity

4C Associates’ Jack Greenwood considers how the Conservative Party’s Manifesto could impact M&A activity and lead to Procurement playing a growing role in Private Equity.

Following the Conservative Party’s troubles during the Snap General Election, Prime Minister Theresa May will move to turn things around by implementing her party’s Manifesto. One key aspect of this document looks to block Investor Merger and Acquisition asset-stripping, to ensure proposed foreign ownership of companies controlling important infrastructure does not undermine British economic or labour security.

To achieve this the Tory/DUP coalition, armed with a (hopeful) five-year mandate, will render some aggressive financial engineering techniques unattractive and publicly unacceptable.  This should in turn represent a challenge for Private Equity firms looking to generate value.

“We welcome overseas investment and want investors to succeed here but not when success is driven by aggressive asset-stripping or tax avoidance.”2017 Conservative Manifesto.

However, the truth is Private Equity is already shifting away from these techniques and towards maximising revenue growth, enhancing working capital and creating higher enterprise value through financial management. In this context, and despite a dated reputation as a simple cost-cutter, Procurement can and should contribute more within the realm of Private Equity.

Each of the areas mentioned above represents a significant opportunity for Procurement to drive revenue and growth, but also actively provide labour and supply chain efficiencies through tried and tested solutions. These include supply chain alignment, cost optimisation, Supplier Relationship Management (SRM) and risk management.

Lessons from the past – Cadbury and AstraZeneca

The high-profile £11.5 billion acquisition of Cadbury by Kraft at the start of the decade, led to the watering down of a quintessentially British brand. This takeover, which was manipulated by foresighted techniques including asset-stripping, highlighted the issue of overseas investors using aged techniques to dismantle UK companies.

Backlash from the British public led the government to increase scrutiny of such activity, through the Panel on Takeovers and Mergers. The Takeover Panel Code, originally developed in 1968, ensures that shareholders should be treated fairly and investors of the same class afforded equal treatment by an offeror. The Code provides a structured framework within which takeovers are to be conducted.

However, despite these initial measures the Code is not all encompassing, as exemplified by Pfizer’s recent approach of AstraZeneca. In this case, the former guaranteed it would preserve UK based operations ahead of a proposed takeover. This was done in the interest of the British economy and labour market, to satisfy the Government and the takeover panel.  In reality, these guarantees were inserted alongside a range of caveats, exceptions and withdrawal techniques that rendered them obsolete.

It is no surprise to see a tightening of rules regarding hostile techniques, which have led to a draining of the national economy. Particularly during the UK’s most important economic and social upheaval of recent times: Brexit negotiations.

“We will require bidders to be clear about their intentions from the outset of the bid process; that all promises and undertakings made in the course of takeover bids can be legally enforced afterwards; and that the government can require a bid to be paused to allow greater scrutiny.” 2017 Conservative Manifesto. 

A welcome opportunity for Procurement

Time and time again, Investor and M&A asset-stripping of this nature attracts negative press and causes extensive brand damage. It also impacts bottom line EBITDA earnings, through remediation and compensation efforts to recover investment sentiment and remain ahead of competitors in the market place.

European Private Equity owned companies are already reliant on the benefits Procurement brings to the table. However, in too many cases these remain tied to short-term cost cutting exercises. Faced with a market under increasing government scrutiny, modern Procurement departments have the capability to combine cost optimisation and growth enhancement to deliver considerable value to Private Equity boardrooms. The function is increasingly capable of delivering value beyond cost, by leveraging new analytical solutions and inputting at a strategic level.

In this context, relying on financial engineering alone to generate returns from portfolio investments is no longer as attractive as it once was. Over the past 10 years, volatile market dynamics and pressure to justify fees, along with tighter legislation has led European Private Equity firms to focus on improving the operational efficiencies of underlying assets to generate required growth, of which Procurement can and should play a vital role.