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Department of Trade and Industry: The Acquisition of German Parcel

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.

"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."

Sir John

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 https://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.

 

PN: 58/00