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Merger & Acquisition

Finding that M&A Sweet Spot for Your Supply Chain

Nov. 3, 2022
A guide to help companies maximize the value of a merger or acquisition.

By almost any measure, it has been a frenetic couple years of deal-making and consolidation in the wholesale distribution sector, with merger and acquisition activity reaching new highs in both value and deal count in 2021, headlined by transactions like the venture capital-funded acquisition of Ingram Micro, the merger between Builders FirstSource and BMC Stock Holdings, and scores of others in a range of industries.

Now the companies involved in all that activity are confronting the complexities of integrating the operations, people, systems, supply chains and cultures of multiple organizations. In many cases, they’re having to resolve the fundamental process and technology issues they inherited from the companies they acquired. Some are looking to unlock the value of the inventory they acquired to try to fill shortfalls in stock on their own side and put those assets to use in other ways to improve cash flow. Others are wrestling with how to replace substandard legacy technology and integrate siloed systems that are hampering planning, forecasting and execution. And all presumably are seeking ways to maximize the value of their newly acquired assets.

As 2023 approaches, some of the biggest players in the distribution segment remain in acquisition mode, knowing mergers and acquisitions (M&A) is often the best route to expand and diversify a portfolio, add scale and profitably grow the business. Distributors on the whole remain an attractive, relatively low-risk acquisition target. Many industrial distributors hold significant untapped value in their inventory—value that increases with inflation. For those that are well-positioned competitively with value-added services, superior subject-matter expertise and technical know-how, the disruption-minded Amazon Businesses of the world don’t pose an immediate threat to take their market share.

Among the toughest challenges for a distribution organization that’s active on the M&A front is finding ways to accelerate the time-to-value on their investments. Based on recent experience with supporting organizations before and after a merger or acquisition, here are steps they can take to meet that challenge.

Strategic

Target acquisitions that fill gaps in your organization’s growth portfolio. Through a flurry of recent acquisitions, Applied Industrial Technologies, for example, has invested heavily in the automation market to complement its strong position in industrial motion, fluid power, flow control, etc. In a down economic cycle like the one we face today, it’s vital that industrial distributors be willing to pursue deals that fit with their growth priorities, such as in adjacent industries.

Tactical

Put technology-enabled process expertise and tools to use across the entire combined entity. As narrow as margins for many industrial distribution organizations have become, there are opportunities to grow margin by applying digital technology. They could move to optimize pricing to avoid leaving money on the table, for example, or automate supplier rebate management to maximize cost recovery. These capabilities can really prove their value in a down economy.

Embrace a shared services model that integrates expertise from Finance, Procurement and IT across the business, recognizing their expertise is critical to innovating and capturing efficiencies across the company. This should involve, for example, shifting the role of IT so it’s no longer viewed as a cost center but rather playing an integral value-added role in strategic decision-making across the business, such as in helping to build out a seamless, multichannel customer journey across the combined entities. As McKinsey notes in a 2019 report, “Distributors with the talent and imagination to reengineer their business models will differentiate themselves from the competition and generate outsize value for customers and shareholders alike.”

Look across the business for opportunities to streamline and tap new sources of value. A company could maximize utilization of its newly combined truck fleet to reduce inbound and outbound transportation costs, for example.

Seize the opportunity to leapfrog the competition by shifting operations to a cloud-based ERP environment. Following a merger or acquisition, companies face difficult choices about how to go about building a technology infrastructure for the combined entity. Moving key systems and processes to an integrated cloud environment gives companies an edge over competitors whose continued reliance on aging technology hampers their ability to evolve their supply chain, inventory and customer-facing practices based on the latest and best industry trends and practices.

Process simplification. The McKinsey report highlights one distributor that nearly doubled its combined-entity earnings (before interest, taxes, depreciation, and amortization) within two years of an acquisition by pursuing procurement synergies. “It consolidated suppliers in key categories; eliminated redundancies in finance, IT, HR and back-office support; consolidated overlapping locations; and designed denser routes.”

Operational

Evaluate the supplier contracts you inherited as a result of an acquisition alongside those you already had in place, and find ways to leverage those that have favorable supplier contract conditions.

Use your newfound position to leverage economies of scale with suppliers and in your channel presence. By bundling volumes from the combined entities, perhaps a company can use its leverage with suppliers to procure Widget A at a lower price or with higher discounts or more favorable payment terms. In situations where the combined entities were buying the same product from multiple suppliers pre-M&A, there’s also an opportunity to increase buying power by consolidating purchases with one of those suppliers.

One final suggestion to offer organizations that are, or intend to be, active on the M&A front:

Focus on technology due diligence as you evaluate the merits of buying or combining with another industrial distributor. Some companies end up taking on more tech liabilities than they bargained for following a merger or acquisition because their tech-related due diligence fell short. But those that are thorough with their tech due diligence put themselves in a great position to tap the synergies and other benefits that motivated them to pursue the deal in the first place.

Magnus Meier is the global VP for wholesale distribution at enterprise solutions provider SAP, where he provides industry thought leadership, portfolio direction and drives the global go-to-market strategy. He’s a senior lecturer at Texas A&M, where he teaches the 'Digital Distributor' course in the Master of Industrial Distribution program.