The case for a supply chain due diligence for M&A success (1)

The case for a supply chain due diligence for M&A success

Gopal Iyer Blog, M&A

According to a recent Harvard Business Review research, about 70% to 90% of acquisitions fail to deliver on planned value. To put things in perspective, the year 2015 alone saw close to $4.7t in declared deals with the average size of deals being $125m. With M&A activities seeing close to a 27% average annual growth, there is lot more riding on a need to succeed than it ever was.

The winter of 1997 saw one of the world’s largest retailers, Walmart, make an entry into the German market through the acquisition of renowned Wertkauf chain of superstores. This was followed by its acquisition of Interspar’s hypermarkets from Spar Handels AG, showing the company’s strong intent to take over the new geography. However, within a decade, after desperate attempts amidst a sea of red ink, the company finally called it a day by selling its 85 remaining units to rival chain Metro.

There were several factors attributed to Walmart’s failure in replicating its famed success, the key being:

  • Lack of understanding of the German customer and consumer behaviour
  • Reluctance to adapt to the local planning and operating principles
  • Attempt to integrate two contrasting supply chains (Wertkauf and Spar) under one entity, without any specific plan
  • And, as a result of the above, a failure to deliver on its value propositions of “everyday low prices” and “excellent service”

The internet today is pitted with such stories of failed M&As. Daimler’s acquisition of Chrysler in 1998 and Quaker Oat’s buyout of Snapple in 1996 saw similar, if not the same failings. In fact, more than 12 of the 20 companies featured in Collins’ 1994 best seller, Built to Last, have seen failings of varied proportions when it comes to mergers and acquisitions.

Experience suggests that companies who have performed proper supply chain due diligence as a part of their M&A strategy tend to have an 80% more chance of success. It helps them foresee risks and opportunities and make an informed decision on what they are getting into. May it be Exxon’s integration with Mobil in late 1990’s, P&G’s acquisition of the Gillette in 2005 or Kraft’s takeover of Cadbury’s in 2010, there are many success stories fuelled by a proper, thought after, supply chain due diligence.

A proper due diligence not only helps uncover one’s own supply chain processes, infrastructure and strategy; but also critically analyses the other firm and helps prioritise projects to aid a successful integration. Though there are no standard rules to carrying out a due diligence, a standard process should be able to answer four sets of questions:

  • Strategising: Why the merger? What value does the parent firm want to generate (growth / capital efficiency). How the supply chain is expected to be affected by this merger?
  • Baselining: What is the state of processes, technology and skill set in both the supply chains. How mature and agile are they?
  • Benchmarking: How do the two supply chains compare with the best in class and their peers? What gaps exist?
  • Opportunity Identification: What opportunities might possible in terms of cost optimisation and growth? Can we identify quick wins? What are the constraints and risks involved?

So what stops firms from carrying out a supply chain due diligence? The key reason is the available skillset to do so. Due to the nature of the beast, the exercise requires an astute understanding of operational supply chains along with an access to a wide array of industry benchmarks. It also requires skills in supply chain finance, commercial contract management and programme management. Though most of these are available within the firm, they are seldom brought together while making that all important decision of choosing a partner for merger.

By taking a supply chain perspective in M&A decisions, firms can ensure that they get a good fit while integrating their processes, systems and culture. It also allows them to critically analyse the “true cost of merger” by better understanding the existing supply chains and the challenges that lie ahead. With a better view on “real” synergy estimates and timings, they can make more informed decisions on choosing merger partners and service their M&A goals.