M&A Spurs Sourcing

<B> M&A Spurs Sourcing</B>
<I>Bigger Corps. Further Global T&E Integration</I>

By Sarah Welt

Companies increasingly are seeking out mergers and acquisitions in order to find greater economies of scale, improve shareholder value and reduce costs--leading many of those corporations to globally source everything from pencils and computers to travel agencies.

Many top T&E spenders are in the midst of the acquisition or merger process--including Allied Signal and Honeywell; Bank Boston and Fleet Bank; BP Amoco and Arco; Hoechst Marion Roussel and Rhone-poulenc Rorer--or recently have completed such consolidations--Bank of America, Citigroup, Deutsche Bank and Pricewaterhouse Coopers (<I>BTN</I>, June 7).

American Express's Consulting Services vice president Paul Thurman said Amex is working with two clients now undergoing global mergers and acquisitions and "we've talked to at least a dozen companies in the past three months about what trends we see and how we can help them."

The companies that join forces face tremendous odds--often they know they are merging but can't share proprietary contract information until they have received government approval to close the deal. However, that doesn't stop a lot of corporations from trying to get as much done as possible prior to approval to circumvent starting from scratch on day one. When companies do get the green light, they know they have to deliver promised savings--leading some companies to approach the low-hanging fruit first, to show an immediate return on investment. However, in order to merge programs, corporations often have to overcome differences in culture and preferred vendors.

"The globalized economy we are living in" is what is driving these mergers, said Caldwell Associates president John Caldwell. "Years ago, the thought was globalization and mergers and acquisitions all started with U.S. companies. That is not the case anymore. In the past 12 months we've seen very big purchases of some U.S. companies by companies in Europe." Additionally, "T&E is getting a hell of a lot more attention than it got a few years ago as a priority item to move in on very quickly upon an acquisition or merger. Ninety percent move pretty quickly after approval of a merger to start global sourcing." Thurman added that mergers and acquisitions are tied to sourcing and "one drives the other."

That seems to have been the case for the London-based British Petroleum and the Chicago-based Amoco when they merged in December 1998 to become BP Amoco plc., with about $200 million in worldwide air spend. The Amoco program was "far more U.S.-centric," said Richard Herbert, BP Amoco procurement manager of global travel. However, each company was involved in a sourcing initiative before the merger and now the company is going through an entire global sourcing initiative. "There is a whole global sourcing team that is working everything from pencils to oil rigs, the process is the same no matter what part of the business you are in," said global travel manager John Vogt. "Now, the opportunities are larger because of more purchasing power."

Prior to finalizing the deal, both companies brought their travel teams together to sort things out and hired consultants to help with the consolidation process.

Herbert and Vogt decided to leverage existing programs, selecting both a corporate card and travel agency first. In the case of the travel agency, it was a matter of going through the bid process with the incumbents. They realized, Herbert said, "there were only two contenders globally--American Express and Carlson Wagonlit." Carlson was BP's incumbent and the new company went live with Carlson in July.

As with the agency selection, in seeking a global card solution, "we took the view that two could do it--American Express and Diners Club," Herbert said. Amoco had used US Bank Visa in the United States and American Express as well as other cards in Europe and the rest of the world, while BP had been using Diner's Club. BP Amoco in May chose Diners Club as its sole card provider. The logic was, said Vogt, "we needed good integrated management information because at our first meeting after the merger, the travel team realized we didn't know how much we were spending and where we were spending it. And secondly, even if we could combine reports from the year before, it probably wouldn't be good information because this is a totally new company."

Vogt said that the new company is on the verge of getting good management information from the card and agency, so "we need to take those and mine them for data to go back to major vendors and do what we'd call longer-term contracts."

However, even with all that has been completed with the new company, BP Amoco is in the process of acquiring the Plano, Texas-based Arco Corp., and while it still awaits final government clearance, the deal is set to close by year-end.

One would expect that deal to throw a wrench in the existing BP Amoco consolidation process, not to mention what it will do to Arco, since it has been going through its own strategic sourcing initiative (<I>BTN</I>, July 19).

On the BP Amoco side at least, since it is an acquisition and not a merger, "we don't believe that adding the Arco piece is going to require us to go all the way back to square one and rebid," Vogt said. However, he noted, "we haven't finally decided exactly how this is going to work. The problem is we can't really share information with our counterparts at Arco yet because we are still in the Federal Trade Commission quiet period and because we are still competitors."

Meanwhile, BankBoston and Fleet Bank, like BP Amoco, are working diligently to integrate as much as possible now while they await government approval. At press time, the deal was set to close Oct. 1. Bank Boston global travel services manager Bruce Miller said that without violating confidentiality agreements, "we've had a series of meetings with vendors to make them aware we are going to become one entity."

Sourcing also is playing a role in the merger. It started with BankBoston and will be extended to Fleet Bank because BankBoston has an international presence and Fleet is primarily a domestic company. Sourcing ties in with wanting to see "as much as possible as soon as possible in terms of the economic piece," said Miller. "Global sourcing was well underway prior to the merger. Part of my challenge over the past 12 months has been to create a global organization with vendors and that process is moving along very quickly."

The fact that both companies use American Express as their agency works to their advantage, Miller said. Both use different corporate cards, which is considered a logical early move. The new company plans to hold off on much of its integration until after the first of the year. The reason? The Y2K bug, which Miller said is the biggest challenge to consolidating programs. "We want to make sure we integrate quickly but we want to make sure that in integrating we don't cause other problems."

Another concern certainly is that the corporate travel department's organizational structure under the new company has yet to be determined. Miller said the travel manager will report to employee services, led by managing director Mary Lynn Kiley. Kiley has not yet named that person, though a decision is expected in about a month. "It could be me or my counterpart at Fleet" (vice president of corporate travel Gari Glennon). Miller remains optimistic however, because he believes there will be room for both. "I am not worried I am going to be selling pencils on the street," he said.

In turn, the big concern at Hoechst Marion Roussel--in the final stages of merging with Rhonepoulenc Rorer (<I>BTN</I>, Sept. 20)--is determining where the North American headquarters will be. The German-based Hoechst Corp. wants to spin off its industrial companies and focus on its life sciences business. The new company is to be called Aventis, with its global base in Strasbourg. "North American headquarters is a critical decision," said Armande LeCompte, HMR's director of travel procurement.

It expects a ruling by December, but in the interim, both Rhonepoulenc and HMR need to function at their respective North American sites in Collegeville, Pa., and Kansas City, Mo. "While it is very difficult for all of us right now to function like nothing is going on, we all know the decision is going to be made that is going to have a major impact on our lives." He added, "In a business environment that is neither here nor there, we've got to maximize corporate interest."

In order to demonstrate value to senior management, HMR and RPR, like the companies mentioned above, have not waited for final approval to find synergies. It brought teams together from both companies over the summer to evaluate "quick hits" throughout the purchasing environment--meaning decisions that would lead to an immediate ROI. "We don't see agency as a quick hit," LeCompte said. Instead, the companies think that renegotiating with airlines and other suppliers makes a logical first step.

"At some point when we are permitted by law" LeCompte said the two companies should "get side by side and see who has the better" contract and then leverage the better deal until rebidding is possible.

Citibank and Travelers Group worked together and exchanged ideas before Citigroup officially formed in October 1998, according to Citibank vice president Mary Kay Bellersen, who also oversees globalization projects. Her advice to companies going through something similar is to "let go of fear, because everyone feels their program is the best. I think you have to recognize each program as a stand-alone for what it accomplished."

Vogt noted that his advice is to "get parties involved together as soon as the lawyers will allow it. The first week of the new corporation we met and put together a complete plan and timetable for integrating the program."

Thurman warned that companies want to take on global sourcing but are focused on the fact that "they want to get money out and they think that getting money out will solve all their problems. The issue is that getting money out is frankly one of the easier tasks. Standardizing the processing, getting information systems to talk to each other, getting cultures and organizations to agree and operate as one--that is where the real change-management challenge is.