Monday, October 19, 2009 2:27 PM
Did you hear the collective sigh of relief on October 14, 2009? Investors were heartened as the Dow Jones industrial average closed above 10,000 points for the first time in a year. Another positive economic sign is the subtle uptick of merger and acquisition (M&A) over the last few months, according recent articles in The New York Times and Yahoo Finance.
The hostile takeover bid of Kraft Foods for Cadbury, Disney’s $4 billion purchase of Marvel Entertainment, and Deutsche Telekom’s reported interest in Sprint Nextel, makes me wonder about the supply chain management (SCM) implications of M&A activity. Are SCM issues appropriately considered during the initial M&A investigation and due-diligence phases? What will the future combined supply chains look like? How well will they meld?
Perhaps asking a more fundamental question is in order: should the acquiring companies like Kraft and Disney even worry about SCM issues? The resounding answer is yes, based on a research study conducted by Accenture and the Economist Intelligence Unit (EIU). In a related Logistics Management article, Accenture Managing Partner Patrick Byrne reports that the majority of survey respondents rate their M&A-related integration efforts as extremely or very successful. However, there were also signs of significant problems:
- 67 percent reported that M&A activity contributed to product-launch disruptions.
- 62 percent experienced a loss of supply chain talent following a merger or acquisition.
- 53 percent noted that their M&A efforts diminished product or service quality.
Hence, the financial success of the M&A initiative may be jeopardized by poor reorganization and management of SCM and logistics processes. And, it makes the three initial questions worthy of investigation. So I chatted with some colleagues who have M&A experience.
While the group readily agrees that SCM should receive significant attention throughout the M&A process, supply chain issues typically don’t arise in early M&A discussions. Part of the reason, says Dr. Sam Weaver, M&A textbook author and former Hershey executive, is that SCM experts are not engaged in initial M&A planning. Financial aspects of these deals dominate early efforts. Also, only a select group of senior executives are involved to keep things quiet.
SCM engagement ramps up during the due-diligence phase. The acquiring company must look for synergies from supply chain integration, according to Mike Kilgore of Chainalytics. Analysis based planning of the combined supply chain assets would also be of great value for validating the M&A business case. However, these early evaluations are largely estimates made with limited data and don’t achieve a granular level analysis of the combined network.
This lack of SCM engagement in the M&A process is what leads to the problems identified above. The misconception of SCM issues being less important than strategic considerations and cost savings can undermine the success of an M&A initiative. As the Accenture/EIU study notes, “the supply chain often accounts for 30 percent to 50 percent of the savings a merger or acquisition ultimately generates. It’s the last thing companies should ever postpone or overlook.”
So what can companies do SCM-wise to promote M&A success? That’s a very important question. Rather than blast through a few generic suggestions, I want to devote some time to the valuable ideas provided by Byrne, Kilgore, and Weaver, as well as Dr. John Langley of Georgia Tech and Dr. Chris Caplice of MIT.
Hence, you’ll have to wait until my next blog entry. It will highlight key recommendations for leveraging the supply chain in M&A planning and execution. Don’t miss it!