Unleashing supply chain value in mergers and acquisitions
By Patrick M. Byrne -- Logistics Management, 1/1/2007
It was the year of the deal: 2006 saw record-breaking highs in the number and size of mergers and acquisitions. That would seem to suggest that business thinks such deals are a good thing. But from a supply chain standpoint, achieving the touted benefits after a deal has closed can become a daunting hurdle.
In a survey of more than 600 business executives who were involved in their companies’ merger and acquisition (M&A) activities, less than half (45 percent) indicated that their most recent deals achieved expected cost-saving synergies. Conducted by Accenture and the Economist Intelligence Unit (EIU), the study also found that just over half (51 percent) said their deals achieved expected revenue synergies.
Another recent research effort by Accenture confirmed that supply chain disruptions are alarmingly common in the aftermath of corporate mergers. That survey of more than 150 supply chain and non-supply-chain managers who were involved in their companies’ most recent mergers revealed that 64 percent of the supply chain managers view their M&A-related integration efforts as extremely or very successful. However:
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67 percent reported that M&A activity contributed to product-launch disruptions.
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62 percent experienced a loss of supply chain talent following a merger or acquisition.
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53 percent noted that their M&A efforts diminished product or service quality.
Taken together, these responses suggest that supply chain managers might be more confident about the success of M&A deals on a strategic level than they are about actual performance. Similarly, responses from the Accenture/EIU survey confirmed that executives are much more confident about their M&A strategies than they are about executing them. Only 45 percent of those respondents were confident of their ability to plan and implement effective organizational design and change management programs.
Respondents to the Accenture/EIU survey most frequently cited “orchestrating and executing the integration process” as one of the most critical elements of M&A success. In many cases, our research and experience have shown that a company’s supply chain is a principal key to an integration and is the most significant source of cost synergies. In other words, if companies fail to get the supply chain equation right in an integration, then they risk losing the value of the deal.
Here are just a few ways merging or acquiring companies can help maximize supply chain benefits and ensure successful M&A engagements.
Take a strategic approach to due diligence. The most successful acquirers go far beyond traditional due diligence. They adopt a strategic approach that involves the disciplined prioritization and organization of a number of fundamental, but often neglected, principles. Beyond simply confirming whether a deal makes near-term financial sense, strategic due diligence identifies specific steps in the integration process that companies can take to ensure a transaction’s long-term success. Strategic due diligence usually involves a large cast of players and always makes use of a wide array of information sources, all of which help to secure the future of the combined companies. With unprecedented growth in cross-border mergers and acquisitions, conducting strategic due diligence is more critical than ever. And the more challenging or different the new business environment, moreover, the more important it is to conduct rigorous due diligence.
Accelerate pre-deal merger planning. In Europe and North America, approximately nine months typically lapse between the announcement of a merger or acquisition deal and its closing. Yet each day pared from this timetable could save—or earn—the merged company millions of dollars.
That’s why a “clean room” strategy that brings neutral analysts into the picture is so valuable. By leveraging the expertise of independent third parties like consultancies, investment banks, law firms, and accounting firms, merging companies are able to conduct the kind of analyses that used to occur after a deal closed. The benefit for the merged entity is rapid value capture from the ability to identify new opportunities to compete effectively from day one.
Set clear goals for supply chain integration.One size does not fit all when it comes to supply chain integration. Executives leading the merger must identify clear goals for supply chain integration that are tied to the individual transaction’s objectives. For example, some companies may choose to use the deal as a catalyst for supply chain transformation. Others may simply aim to keep the supply chain running smoothly during the transition.
Involving supply chain executives early in the merger-planning process is critical. This ensures that supply chain and operations issues are elevated to the same level of importance as finance, information technology, and sales and marketing functions. With supply chain leaders in the room, so to speak, chances are better that customer-facing improvements will be viewed with the same level of enthusiasm as economies of scale.
When establishing these goals, executives should also focus on metrics that reward integration and value creation. Consider that nearly half of the respondents to the second Accenture survey said that their companies focused on cost savings during the integration period. Many more synergies might have been attainable had they also considered the value of higher product quality, fewer supply chain disruptions, and potential increases in inventory turns or fill rates.
Create an environment that embraces change. Successful integration might also be enhanced if companies worked harder to embrace change rather than seeking to minimize it. The integration period is an ideal time to consider a “clean sheet” of cost structures, cultures, operational processes, and resource/technology requirements.
Embracing change throughout the integration process requires a clear organizational structure with defined accountabilities, as well as commitment and leadership from top management. Companies should also integrate supply chain capabilities that can adapt to demand changes or supply disruptions that may occur as a result of the merger.
Leverage the Supply Chain
Though often overlooked, the ability to deliver on the promise of a deal’s synergies frequently resides in the supply chain. As the engine behind customer satisfaction and getting new products to market, the supply chain can either make a lot go right—or wrong—in the integration process. With many believing that there’s no end in sight for the current boom in mergers and acquisitions, any executive should want to understand how the supply chain can be better leveraged to achieve M&A synergies.
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