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M&As have come a very long way in recent years. M&A deals continue to be on the rise 2015 saw the value of mergers and acquisitions hit a record global high of 2.79tn and the upward trend is projected to continue throughout 2016 and beyond as confidence improves across boardrooms worldwide.
But according to recent Harvard Business Review research, about 70 per cent to 90 per cent of acquisitions fail to deliver on planned value. To put things in perspective, 2015 alone saw close to $4.7tn in declared deals with the average size of deals being $125m. With M&A activities seeing close to a 27 per cent average annual growth, there is lot more riding on a need to succeed than it ever was.
From fuelling competitive advantage and increasing market share, helping new product partnerships to enter new markets and even create new service models M&As have become the new reality in todays business landscape.
Read more about M&A deals:
- Essential tips to execute an M&A deal with a manufacturing firm
- Asian businesses offer strong M&A opportunities for British companies
- How to avoid an M&A nightmare
Get the due diligence right
It is imperative that a strategic move like an M&A is supported by a thorough due diligence. It goes without saying that potential buyers will perform financial due diligence in order to value the deal and determine their bid strategies. But experience suggests that bosses who have performed proper supply chain due diligence as a part of their M&A strategy tend to have an 80 per cent more chance of success.
Though there are no standard rules to carrying out a due diligence, a standard process should have four goals:
(1) Strategic outlook: Why the merger (growth / capital efficiency)” How the supply chain is expected to be affected by this merger
(2) Current baseline: What is the state of processes, technology and skill set in both the supply chains
(3) Benchmarks: How do the two supply chains compare with the best in class and their peers
(4) Way forward: What opportunities might be possible in terms of cost optimisation and growth
Having worked with many M&A scenarios over the past years, experience dictates that using proper supply chain diagnostics can contribute to its success and that employing them at every stage of the process can help to avoid potential pitfalls.
A three-step process to understanding supply chain logistics can be found on the next page.
The due diligence process begins firstly with a supply chain assessment, driven by high level interviews and existing supply chain reports. This would include clarification of the overall business strategy and understanding of the wider supply chain. A maturity and gap analysis (a measurement of interest rate risk for risk-sensitive assets and liabilities) should also be carried out to get a picture of the current business supply chain.
The second step involves modelling the current supply chain and developing a baseline, which is the standard set by which to measure the subsequent changes that will be implemented during the process. A host of questions are researched and supported with details at local level such as:
- How are the current synergies shared within the network
- Will they still exist after the merger
- What are the ongoing costs of the extended network
- What production facilities and product lines are liable to continue
Understanding the capacities and challenges of the physical supply chain network and implications (operational, financial and legal) is imperative and to assess three key areas design, planning and execution. Overall, evaluation of the supply chain systems cannot be neglected and benchmarking of the existing capabilities should also be carried out to quantitatively and qualitatively measure current performances and identify gaps.
Beware of politics
The next step of the process is to identify initiatives and prioritise them as short, medium and long term plans. This step is a collaborative process in itself, and requires buy-ins from multiple stakeholders who may be a part of the active supply chain, or are representing the upstream and downstream dependencies in the network. This step can get quite political, so it is important to openly communicate the various improvement opportunities, the assessed (and quantified) impact and business priorities.
A mature discussion is required at this stage, free from any biased KPIs or ulterior motives and establish commitment to the initiatives. Also, having a clear value stream and process maps (which analyse the current and future states for the series of events about to happen) help to ease any confusion going forward. This also presents an opportunity to identify any red flags or gaps in the supply chain.
Report and communicate
The initiatives need to be well documented along with the financial outcomes and respective project plans. It is useful to rate initiatives on their relative outcomes and ease of implementation in order to prioritise them. Finally, project goals, responsibilities and key objectives need to be agreed for each initiative.
In order to ensure minimal disruption in the new, merged supply chain, suppliers and customers need to be assured and calmed during times of transition communication is key. Plus, measures such as OTIF (on time in full), order to fulfilment cycle time and inventory levels need to be carefully monitored to maintain high service levels. It is probably a good idea to bring in external help, in the form of consultants or subject matter experts, as they bring industry intelligence and their experience from similar transformation projects. A careful selection of the right consultant can significantly improve the overall chance of success while greatly shrinking the implementation timeline.
The landscape is as rife with stories of failed M&As as it successes. The failure rate is largely attributed to the choice of company to acquire, the price paid, and the process of integration. Not surprisingly, all of them greatly affected by supply chains. As the focus on M&A grows further, the need for a thorough supply chain due diligence can only increase.
Gopal Iyer is a supply chain consultant at 4C Associates.
Meanwhile, three experienced acquisition practitioners came together at The FD Surgery, hosted by Real Business, to discuss how finance directors and CFOs can seamlessly roll out a buy and build strategy for their companies.
