(“Originally published on SIA Staffing Stream, February 19, 2014.”)
You have just learned that the company providing your contingent workforce Vendor Management System (VMS) has been acquired. What impact will that have on you? The sad truth is that numerous studies examining thousands of mergers and acquisitions have concluded that the failure rate is greater than 50%, with some studies pushing that percentage up to 70%. Of course, in these studies “failure” refers to an inability for the acquirer to achieve the anticipated financial and business results. As a company whose vendor has recently been acquired, your definition of failure focuses on the level of disruption that occurs and the degree to which the disruption adversely impacts the quality of service you receive.
At this time, merger and acquisition activity in the contingent workforce procurement and management space is heating up, and we can expect to see additional acquisitions in 2014. Vendor Management System (VMS) providers, Managed Services Providers (MSPs), Procurement outsourcers (a.k.a. BPO firms) and vendors providing procurement and ERP software are all showing increased M&A activity. While some acquisitions are beneficial to clients, trends have emerged tying the type of buyer to the post-acquisition experience.
When private equity (PE) groups take a majority share in a company, the aim is to increase the profitability of the acquired firm in preparation for resell at a premium price. Ownership changes and reorganizations are very common for these companies. In the worst case scenarios, the PE group minimizes their investment, funding the deal through debt. In these cases, the debt burden precludes them from investing in new technology, worker skills or organizational improvements. Private equity firms typically hold companies for four to five years, and the two largest VMS providers are both own by PE groups, and were both acquired at more than three years ago. Another sale, and further disruption, may be expected in the near future.
The dynamic is often different when a company acquires another in its industry. In these cases, companies must guard against the acquirer discontinuing the acquired product entirely or incorporating its capabilities into one of their own products, forcing customers to transition to a new product.
As each deal is struck, the acquirer issues a press release explaining their desire to enter new markets, increase market share, and better serve their clients. When a VMS provider is acquired, they generally promise clients that the integration of their combined capabilities will result in faster development of new releases, increased product quality, and an expanded team of resources devoted to each client.
To protect your interests, steps should be taken when the letter of intent is issued, or when you first hear of a potential deal. What questions do you need to ask, and what steps should you take, to be sure that the vendor makes good on these promises? In our experience, the following course of action has provided the best outcomes.
During the Initial period following the acquisition, it may be appropriate to “wait and see”. However, you must be prepared to implement your transition plan if needed. Either way, if you have considered the points above and have a ‘Plan B’ you will be in a much stronger position.
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