Delivering Merger Synergy: A Supply Chain Perspective

As more companies increasingly depend on combinations to fuel a larger portion of their growth, it becomes evermore critical for those deals to be successful and to deliver the promised synergies.

Recognizing that the supply chain plays a critical role in the success of any communications or high tech industry deal—and indeed is fundamental to achieving high performance of the expanded company—can help ensure that the transition in this key functional area goes smoothly. This recognition in turn can increase the chances that customers, shareholders and Wall Street will feel as good about the new entity a year after the merger as the constituent organizations' senior executives did the day it was announced.

After some quiet years, merger and acquisition (M&A) activity is beginning to gain momentum in the communications and high tech sectors.

However, realizing the full synergy potential of a merger can be an uphill battle: half of all mergers fail to create shareholder value, and less than 30 percent create value that is noticeably higher than industry average returns.

In Accenture's experience, one of the most critical reasons for this underachievement is failure to pay enough attention to supply chain issues—whether during pre-deal strategy setting or during the actual merger planning and subsequent integration.

The importance of supply chain to merger success was demonstrated by an international study team made up of researchers from Accenture, INSEAD and Stanford University as part of Accenture's High Performance Business research initiative. The team found that supply chain excellence is directly tied to a company's financial performance.

Achieving supply chain excellence is crucial for merging companies that seek to achieve high performance by expanding into new markets, rationalizing distribution channels and consolidating excess capacity.

Financial analysts pay close attention to a merger's potential cost synergies as these are both tangible and easily measured. In many deals in the communications and high technology sector, supply chain is the most significant source of these cost synergies—accounting for between 30 percent and 50 percent of savings.

For example, in the recently announced merger between Taiwan's BenQ and Siemens Mobile Devices operations, supply chain and manufacturing is expected to account for more than 70 percent of total cost synergies. In a merger between two large Telecom carriers, sourcing and procurement synergies alone accounted for nearly 30 percent of total cost and revenue synergies.

But direct cost savings are only part of the impact of supply chain on merger success. Accenture has found that the supply chain is one functional area that has a direct impact on all four of the major types of synergies that can result from a merger:

Revenue. A superior supply chain protects revenue during times of transition by ensuring no supply disruptions and by enabling an organization to generate stronger top-line growth in new products, new markets and geographies.

Operating expense. How effectively the company procures goods and services and how efficiently the supply chain runs has a direct impact on net income and operating margins.

Capital expenditure. Because the supply chain often accounts for a significant portion of a company's physical assets (such as manufacturing plants, telecom network assets, warehouses and truck fleets), excellence in strategic sourcing and supply chain operations can strongly influence a company's cash outflow.

Working capital. For example, in wireless telecom companies, inventory investment in mobile devices can exceed hundreds of millions of dollars. The ability to rationalize this investment and reduce it through the application of cross-company best practices represents a significant cash synergy opportunity

By studying numerous deals, Accenture has found that a major success factor is the way the combining entities managed supply chain issues throughout the genesis, structuring and consummation of the deal. Accenture's approach differs from others in that it does not see supply chain integration as just a post-merger activity. Instead Accenture recommends bringing industry sector, supply chain, and post-merger strategy expertise together during the pre-deal planning phase.

While specific activities will vary by company, this approach encompasses several essential steps:

Identify leadership and team: Senior management of the merging entities must identify their supply chain leaders early, and establish a supply chain integration team with a clear charter and scope. This team should ideally be led by a seasoned, "heavyweight" executive who carries credibility with peers and has well-established relationships with other functions and the line organizations

Identifying synergies: Estimating the value of synergies requires the skillful blending of "top-down" and "bottom-up" methodologies. The deal execution team should first consider "top-down" industry benchmarks to determine the magnitude of the overall opportunity, supplementing this with knowledge of synergy opportunities achieved by comparable mergers. The team should also identify specific "bottom-up" opportunities, such as consolidation of distribution facilities, or identifying cost savings through side-by-side comparative analysis of supply contracts. By marrying these results to the top-down benchmarks, the company can evaluate if the top-down estimates are realistic—and if the due diligence teams have been aggressive enough in outlining specific opportunities.

Determining "Day 0" requirements: The team must determine requirements for the supply chain both at deal close (Day 0) and for the longer term, identifying the specific supply chain initiatives needed to integrate the organizations, ensure no supply disruptions or customer service degradation and deliver the planned synergies.

By prioritizing these initiatives on the basis of impact on customer service, synergy value, ease of implementation and potential impact on employees, the team can help ensure that the merged organization is ready to begin generating value immediately upon closure of the deal.

Developing metrics: Finally, the team must develop a set of supply chain merger integration success metrics. These metrics may differ significantly from internal supply chain scorecards, which measure and track the efficiency and effectiveness of steady-state operations. Such metrics will help the newly integrated supply chain organization gauge the success of merger integration, and keep the team focused on the most important priorities.

Only by focusing on supply chain issues early in the merger process, and following through on those opportunities after the merger, will companies achieve full value from their supply chain synergies, and hence from the merger itself

Arun K. Saksena, associate partner- Accenture Supply Chain Management, assists companies in the communications and high-tech industries with supply chain transformation, product development and strategic sourcing to help them improve their performance.

Terry W. Steger, senior manager-Accenture Supply Chain Management, helps communications, high-tech, and media and entertainment companies design and implement major change initiatives in procurement, supply chain and service management operations.