As few as 30 percent of mergers and acquisitions succeed in increasing shareholder value (SHV). The few that have achieved significant increases, such as Cisco and GE, have been the ones that have effectively exploited the synergies of supply chain integration.
Though the less successful organisations may recognise the supply chain as an important source of efficiencies, they fail to realise those efficiencies because they focus on cost-cutting measures and the aggregation of purchasing power. These measures in themselves are not sufficient to deliver the looked-for benefits.
The organisations that do deliver the benefits are those that exploit technical and market synergies between previously disparate supply chain processes. Success requires thorough, systematic integration of both the supply chain processes themselves and the associated customer interfaces - integration that must be accompanied in each case by the adoption of best practice.
If all that is achieved, the market can be served with proportionally lower costs, and the promised increases in SHV will materialise.
Failure to deliver
A recent survey , analysing the 700 highest-value international deals from 1996 to 1998, found that 83 percent of corporate mergers and acquisitions failed to enhance shareholder value.
The acquisition trail is littered with many embarrassingly well-documented examples of failure, where the acquirer has subsequently been forced to sell the acquisition at a loss:
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After five years of losses amounting to more than $2 billion, AT&T gave up trying to make its acquisition of NCR work and sold the business off |
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Dow Jones & Co acquired Telerate Inc for $1.6 billion only to sell it for $510 million |
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Having paid $4 billion for PCS Health Systems, Eli Lilly ended up
taking a $2.4 billion charge against earnings to write down the value
of its investment |
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Most recently, Rite Aid Corps decided to sell the pharmacy-benefit business it acquired from Eli Lilly & Co within a year for $1.5 billion. |
These examples are not exceptions, as shown in Figure 1, extracted from the Creating Shareholder Value from acquisition integration survey carried out by PA Consulting Group in June 2000.
Figure 1: Returns after acquisition announcement
Post-merger disappointment occurs for a number of reasons. From an integration process perspective, the most consistently identified causes are that businesses fail to:
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Carry out sufficient up-front investment in due diligence, integration planning and team formation |
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Employ a best-practice integration programme management process, as illustrated in Figure 2 |
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Communicate to all stakeholders - shareholders, suppliers, customers and particularly employees |
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Manage cultural differences, without destroying the value they
often bring. |
Figure 2: Best-practice integration
We believe the biggest single reason why acquisitions fail to deliver their full potential is that they don't take a radical enough approach to supply chain improvement.
Aiming higher
The importance of supply chain optimisation following an acquisition is reasonably well recognised; companies understand that an average of 80 percent of the cost of the business resides in the supply chain, and therefore they know it is a key opportunity area for the combined business.
What companies don't understand is the best way to exploit this opportunity. In the past, cost cutting, through reductions in the number of operating facilities and/or people, has been the primary method. But today most businesses are already operating such lean supply chains that traditional cost cutting approaches can deliver only minimal benefits. What's more, the effect of cost cutting is often negated, at least in the short term, by the associated restructuring costs.
Another traditional approach is to harness the increased purchasing power of the combined business. While this approach can generate significant savings, these on their own are not usually big enough to satisfy shareholders, who wait impatiently for the benefits of acquisition to appear on the bottom line.
By limiting their efforts to the traditional but inadequate measures of cost cutting and purchasing power aggregation, companies for the most part realise only trivial improvements. For the drastic gains they seek, companies need to look beyond these 'low-hanging fruit' for more fundamental synergies.
To see what can be achieved with a radical approach, let's consider an example. In 1998 Meyer International acquired the Harcros builders' merchant group with the clearly-defined intention of expanding and improving Jewson, Meyer International's own chain of builders' merchants. At the time of acquisition Meyer International declared that it wished to "manage the supply chain in each of our businesses with increasing effectiveness" as well as to "use our buying power from our expanded profit centres."
By re-branding the Harcros stores and rolling out a single integrated information system, this company has greatly enhanced its customer interface and ensured a consistent order capture and management process. At the same time, the integration initiative has ensured clarity of product offerings and improved quality of product information, both internally and externally. This was accompanied by a training programme for all middle management, from both Jewson and Harcros, with a particular emphasis on the supply chain. The business impact has been gratifyingly substantial. Jewson has produced a 12 percent growth in its operating profit, and the return on the Harcros acquisition after two years was 16 percent on the purchase price, comfortably exceeding the externally-assessed weighted average cost of capital of 10 percent.
Identifying obstacles
Integrating the supply chain processes of the customer interface and supply chain planning can deliver large business benefits rapidly, but it is hard work and requires a bold approach on the part of management.
There are two groups of hurdles to be overcome at the supply chain operational level: those of structural inheritance and those relating to the organisation's people and their behaviour (Fig 3).
Figure 3: Typical post-acquisition challenges
Since so many of these factors are common to most post-acquisition scenarios, it has been possible to develop a generalised framework to help companies in this situation profit from the experiences of others as they address the hurdles of structural inheritance. The people and behavioural hurdles should be addressed through the adoption of a best practice integration process, (Fig 2), the benefits of which are demonstrated in Figure 1.
The supply chain synergies grid
The supply chain synergies grid (Fig 4) has been designed to help organisations identify opportunities for selective integration of the customer interface and supply chain planning processes. It has been developed through our practical experience of assisting clients from many sectors of manufacturing industry to maximise the supply chain opportunities of the post-merger business.
A merged business inherits a mix of supply chains. Particularly, if the two parties to the merger have been through periods of rapid change, they may each exhibit multiple, often underperforming, supply chains.
These supply chains may or may not:
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Provide similar products |
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Use similar manufacturing/processing technologies |
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Serve a similar customer base. |
The simplest and most effective way of defining the focus for improvement and integration is through considering the processing technology and market synergies (Fig 4).
Figure 4: The supply chain synergies grid
If there is little synergy in either technologies or markets, then the focus will be on improving existing supply chains rather than integration. Where the similarities in manufacturing or processing technology are extensive, integration of the supply chain planning process can be extremely beneficial because it can maximise the use of supply chain assets. Where the overlap of markets is great, then providing customers with a single 'one-stop-shop' interface improves customer retention and attracts additional business at low cost.
Addressing the challenges of structural inheritance requires clear definition of market focus, alignment of the business processes with delivery of the customer proposition and elimination of selling and processing duplication in the supply chain. This normally requires a significant change programme of the 'business process re-engineering' type.
Such a programme is an ideal opportunity to ensure that the company is making optimum use of information systems, and particularly of e-business techniques. Automating the integrated and re-engineered processes with business-wide ERP systems creates an opportunity for additional efficiencies. It is essential to tackle internal supply chain process integration before trying to optimise linkages with the wider external supply network. But Internet technology makes it feasible to create an instantaneous flow of information along the entire length of the supply chain, starting with the consumer. The company engaged in post-acquisition process integration can't afford to overlook either the internal or the external opportunities presented by
e-business technologies.
Seize the moment
Once a business turns an acquisition into an opportunity for integration and optimisation of supply chain processes and customer interfaces, the benefits can be dramatic. In fact, they may be even greater than those defined by the original business case for the acquisition, because of the possibility of rectifying inefficiencies that existed in each of the merged organisations.
At one industrial electric motor manufacturer, a review revealed that similar or even identical motors were available from three sites - sites that would at times compete with each other for the same orders. The result was poor delivery performance and poor utilisation of people and equipment: often, one site had insufficient work whilst another was working high levels of overtime.
When this company adopted a single integrated customer interface, service levels improved by between 30-40 percent. And when it introduced a centralised planning process focused on balancing the demand across the sites, aggregated capacity utilisation increased by 25 percent.
Benefits like these don't just fall into one's lap. Post-merger process integration must be realistically planned from the outset and the delivery of the benefits systematically managed and measured.
The stars of the mergers and acquisition world are Cisco and General Electric who have outperformed their sector market indices by 40 and 5 times respectively, largely on the back of successful acquisition 'machines' where leveraging focused supply chain process integration is a key element of their strategies.
But these businesses do not have exclusive rights to the deployment of supply chain process integration. When your own business contemplates a merger or acquisition, will you be bold enough to join the professional league?
