Most mergers and acquisitions are failures. According to a study by KPMG looking into the success of these deals, 83 percent were unsuccessful in producing any business benefit in terms of shareholder value.
What's missing in many cases is any understanding of the value of the supply chain.
"We've come in after mergers and acquisitions and we said 'Maybe your company should have tried to understand whether there really were economies of scale before they did the deal,'" says Jerry Shapiro, president of Slim Technologies, a company that uses planning software to help clients consolidate their supply chains after a merger or acquisition.
Shareholder value suffers if you don't do your homework, but your customers are also the victims. The best way to prevent victimhood is to do a business process analysis. Take the case of two large pet food companies that merged. As a result of the merger, there were 31 plants in the supply chain network. The merged company had to determine which plants would prove inefficient in getting product to the market. They also had to determine alignment of the two companies' products. Was there overlap? Answering this would help them make sure they were efficiently making the combined products and getting them to market.
"In this case, after the study was done, the pet food company identified that of its 31 plants, seven needed to be shut down," Shapiro explains. "They were able to reduce total supply chain costs by 9 percent. They asked themselves, 'Are those two product lines really different?' You may sell them under different brands, but upstream in the supply chain you make them in the same way."
As companies buy one another, they have to find costs that can come out. The supply chain provides ample opportunities. By eliminating product redundancy, you also eliminate dual stocking points. That's good for the merged company and its customers.
"The strategic value for the customers is that they can now order less inventory of any one SKU to get a full truckload and therefore a better price," says Rick Blasgen, senior vice president of integrated logistics for ConAgra Foods. "That improves their ability to turn inventory faster. It's easier to make up a more efficient truck from a transportation standpoint."
ConAgra's growing list of acquired brands in the packaged foods business includes International Home Foods, Healthy Choice, Butterball, Orville Redenbacher and Swiss Miss. ConAgra owns some 100 consumer brands, including 27 with annual retail sales of more than $100 million.
Merged companies must also make tough decisions about information systems. That's both a practical issue and a cultural issue.
"You typically migrate to one order-to-cash platform," Blasgen continues. "If the fundamentals of the platform of the acquiring company are such that it's fully integrated with everything else they have and it depends on the other order management systems that you'll migrate to, it's a pretty simple solution. If the acquiring company isn't as proficient as the one they're buying, you could take some functionality from the acquired company and employ that in the core company. But when you're running a big supply chain that's already integrated with the other systems the company has, you may lose a little functionality at one end, but everything that's coming into that company gains the benefit of that bigger scale."
Blasgen speaks from many years of experience managing amid mergers. Before ConAgra, he was part of the integration team for Nabisco and Kraft. He then led the North American supply chain for Kraft. He's been at ConAgra for a little more than a year, and he's still tying up loose ends from its consolidations.
Be part of C-level strategy
These are not things that can happen overnight. That's why supply chain logistics planning is so important during mergers and acquisitions.
Unfortunately, those details are rarely on the radar screen of the financial gurus who may be driving these corporate marriages. They'd do well to follow the example of SK Daifuku.
If you can show senior management or C-level executives that your logistics operations are in good enough shape to capitalize on whatever strategic decision they make, a merger or an acquisition can be a relatively quick and painless proposition.
SK Daifuku Corporation merged with Daifuku America Corporation, combining Daifuku's three global product groups in North America into one wholly owned North American subsidiary of Daifuku Co. Ltd. Previously, Daifuku America served the automotive assembly material handling market while SK Daifuku served the semiconductor (cleanroom) and manufacturing/warehousing/ distribution material handling markets in North America.
David Koch, senior vice president of Daifuku America, says having one organization allows easier cross-industry sharing of ideas and applications, and it has helped the company improve customer service. He advises companies that follow their lead to take their time, however.
"Our first step was to keep things status quo," he explains. "We took about six months to evaluate where people were located and to determine if those were the right places for service centers. We combined a couple and expanded a couple to try to meld the service response for all three of our divisions. Many companies try to do that, but some pull the trigger a little too quickly and end up hurting themselves. That's common in warehousing and distribution. They'll decide to close a place without enough analysis and understanding of the implications because they're under the gun to show the value and savings of the merger and get to the bottom-line benefits as quickly as they can."
That can have a negative impact, but it might not be felt right away.
"Sometimes when senior management does a merger or acquisition, they'll estimate the kind of savings that can come from closing a DC on a gross basis," Koch concludes. "Sometimes what you don't see downstream is the impact on your customers, your sales process and your ability to deliver to your customers — unless you start getting a lot of calls from the senior-management level saying customers aren't getting their parts or material."
That can be both a challenge and an opportunity for those responsible for material handling and supply chain management. The main reason mergers and acquisitions fail is a mismatch at the operational level. If you can show senior management or C-level executives that your logistics operations are in good enough shape to capitalize on whatever strategic decision they make, a merger or an acquisition can be a relatively quick and painless proposition.
"This does not have to be a two-year project," promises Bruce Bauman, principal of Misceo LLC. Misceo helps companies identify the cultural risk factors that can compromise M&As. "In a couple weeks you can get the kind of information you need by doing an assessment of the corporate operational culture. But first you have to know the purpose of the acquisition. If it's simply to buy someone else's customer list, then the powers that be may not be that interested in business processes. If you're talking adding value and establishing synergy between two companies, then you have to look deeper."
Bauman's partner at Misceo, Larry Gray, acknowledges there's a difference between how Fortune 500 companies do acquisitions and how small to medium-size businesses do them.
"The bigger guys tend not to look at the operational levels of an organization," he says. "It's more of a financial acquisition and if it doesn't go well, so what. Time-Warner and AOL are a prime example of that. They can have an unsuccessful merger but they can still survive and make money, and there's still stockholder growth. Smaller to mid-size organizations can't afford that. It's critical for them to make the merger work."
The way they do that is by mapping the business processes.
Business process improvement
This is a good thing to do even if a merger or acquisition isn't on the radar screen, according to Gray. If a merger never takes place, at least your business processes are documented and you've set the stage for continuous improvement. During the process you may discover non-value-added activity that can be streamlined. Then, when a merger or acquisition is on the horizon, your organization will be ready.
The idea is, if the business processes of two organizations are fairly close, then issues like incompatible software and systems becomes less of a problem. As long as the business processes are closely related from a human resources perspective, then standardizing on one software system or platform may be a lot easier to do than if the business processes were totally different.
Gray recalls the case of a client he worked with in the foodprocessing industry. This company grew by acquisition. It ended up with 14 locations around the country run on six different software applications. This company tried to standardize on one and found it to be a nightmare. Finally it decided to centralize procurement and order processing. Inventory management, plant maintenance, logistics and traffic control maintained their own unique systems.
"When we define business processes, it's more about what people do," Gray concludes. "It's not the software but the physical activities. The client said, 'Let's try to standardize on those throughout the organization, so people are doing things similarly, regardless of software. That way we have some flexibility in moving people and product around through facilities.'"
Your stake in the deal
As we approach a more global economy, we can expect to see more and more M&A activity. According to a study by Accenture, more than 70 percent of the 100 executives polled are either currently undertaking an M&A transaction or are planning to do so within the next year. The majority (74 percent) expect their companies to acquire smaller players. The reasons for the M&A?
- More than half (54 percent) of the executives said that mergers and acquisitions are part of their ongoing growth strategy for value creation;
- About one-fourth (27 percent) said they need more growth than their core business can provide;
- Ten percent said there is less opportunity to increase value through operational efficiencies.
"Businesses increasingly seek to drive growth through mergers and acquisitions because there are fewer perceived opportunities to increase operating efficiencies or grow organically," concludes Ravi Chanmugam, a partner in Accenture's Strategy & Business Architecture practice. "However, we find that few companies have well-established post-merger integration processes that can capture value from their transactions, and very few executives are measured on effective integration metrics."
Whether you work for a company that's doing the acquiring or one that's being acquired, perfecting material handling operations and supply chain relationships beforehand will make you a more valuable member of the newly merged entity. Operational efficiencies are your job. Act now to protect your stake in the M&A deal.