Press Release - Department of Trade and Industry: The
Acquisition of German Parcel
24 August 2000
The Department of Trade & Industry (the DTI)’s approach to
the Post Office’s purchase of German Parcel for £289 million was
reasonable under the circumstances, Sir John Bourn, head of the
National Audit Office, reported to Parliament today. The Post
Office wanted to buy German Parcel and the DTI had the
responsibility for overseeing the acquisition, but not for making
it. This division of responsibilities posed a challenge for both
organisations.
This major acquisition in January 1999 was one of the first for
many years by a publicly owned company, giving the DTI little
experience on which to draw. There were also difficulties in
valuing strategic benefits and uncertainty over the extent to which
they might be achieved. A full assessment of the value for money of
the acquisition will not be possible until the Post Office's
overall acquisition strategy comes to fruition in a number of
years.
The DTI had agreed with the Post Office that the acquisition
could go ahead on the basis that it was consistent with the
strategy approved by Ministers and that it would not lose money,
after taking into account purchase costs. The DTI recognised that
there was uncertainty over the value of the business, demonstrated
by the £109 million difference between the best and the loss-making
worst case. A key aspect of the deal was that the DTI decided that
the acquisition should be funded at commercial rates of interest to
assure competitors that the Post Office was not acting in an
anti-competitive way and to subject the Post Office to additional
commercial disciplines.
Because DTI took its responsibilities seriously, the NAO has
drawn on this experience and on good practice in the private sector
and has identified ways forward that might help departments to
monitor and appraise acquisitions above a pre-agreed materiality
threshold:
| What happened in the case of German Parcel. |
| Board approvals: |
|
| (i) The Chief Executive of the Post Office wrote to
the DTI reporting unanimous approval of the acquisition by the
whole Post Office Board. |
NAO considers the level of detail provided to the Board highly
relevant, as the Board is likely to be the best judge of the
implications of the transaction for the business. The whole Board
should be prepared to give a department assurance on its knowledge,
approval and accountability for an acquisition. Its professional
advisers should also give opinions on the terms agreed to the
Board. |
| Advisory team: |
| (ii) The DTI employed an individual adviser who was
required to work to a tight, commercially driven timetable, as is
usual in an acquisition. Since the acquisition, it has access to a
multidisciplinary team to comment as and when required on the Post
Office’s strategy and any major acquisition proposal. |
A department, in addition to seeking outside advice, should try
to establish a team with corporate finance and relevant sectoral
experience to appraise an acquisition proposal. |
| Public disclosure: |
| (iii) The Post Office initially disclosed only a
broad indication of the price paid, and the DTI accepts the case
for fuller disclosure. |
A department should insist on disclosure of information about
an acquisition as if the purchaser were a private sector company
quoted on the Stock Exchange, unless there are good reasons not to
do so. |
| Financial targets: |
| (iv) Post Office financial targets were tied to
meeting its own short term business plan for German Parcel. |
A department should agree a clear statement of overall
performance targets, such as a stated contribution to profits,
before agreeing to an acquisition. |
Sir John said today:
"The Department of Trade and Industry has supported the
Post Office’s acquisition of German Parcel in a way that helps to
reinforce commercial disciplines. This was a pathfinder transaction
and there are lessons for other departments with a responsibility
for overseeing acquisitions."
Notes for Editors
The Post Office is a state owned business accountable to the
Secretary of State for Trade and Industry. It has a statutory
monopoly in the delivery of letters and parcels costing less than
£1 in the United Kingdom (unless they weigh over 350 grammes) but
operates in competition with other businesses for all other
mail.
The Post Office’s aim, approved by the Government, is to
transform itself into a leading international business supplying
customers with a full range of global distribution services. A key
element in the strategy to achieve this is a programme of
acquisitions.
The acquisition of German Parcel, the third largest private
parcel business in Germany, was the Post Office’s first major
diversification into overseas markets and was undertaken in
agreement with the Department of Trade and Industry and the
Treasury. Acquisitions by the Post Office since German Parcel bring
the overall total to about £500 million.
This report – Department of Trade and Industry: The Acquisition
of German Parcel – is about the oversight by the DTI of this
acquisition. The National Audit Office is specifically barred by
the National Audit Act 1983 from carrying out the audit of the Post
Office. The NAO is, however, the auditing body of the DTI whose
agreement was needed for the acquisition to go ahead.
Press notices and reports are available from the date of
publication on the NAO website at http://www.nao.org.uk/ Hard copies can
be obtained from The Stationery Office on 0845 702 3474.
The Comptroller and Auditor General, Sir John Bourn, is the head
of the National Audit Office employing some 750 staff. He and the
NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 58/00
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