Mergers & Acquisitions: Disparate Measures

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Integrating disparate supply chains demands a holistic approach, with careful detail to every core function. From IT compatibility to corporate culture clashes, this article sorts out complicated pieces of supply chain integration to find out where they fit in today's M&A puzzle.

Supply chain integration is a hot topic in today's global economy. Given the rabid market for mergers and acquisitions (M&A), it should logically play a critical role as businesses consider potential deals. But it doesn't.

Just three years ago, Orion Consulting, Chicago, Ill., reported that less than five percent of companies it worked with during the M&A process implemented a combination of financial and supply-chain evaluations as its main criteria, and less than one percent were driven purely by supply chain motives.

"How quickly and intelligently you integrate new assets such as plants, warehouses, or transportation equipment into an existing supply chain network can make or break the early success of a merger," notes Tom Brown, vice president, Orion Consulting. "Because M&A decisions are largely driven by a corporation's strategic financial or market share goals, they commonly flounder when it's time for the two enterprises to start working as an integrated entity."

Brown's comments resonate louder and clearer today amid the cacophony of corporate takeovers and alliances. But the question remains: where does supply chain integration fit in the M&A puzzle?

A Reductionist View

From a reductionist perspective, the very act of consolidating or acquiring business assets is supply chain integration—that is to say, two disparate supply chains are being brought together, with the goal of some form of integration. The broader reality, and the greater concern for corporate executives and shareholders, is the impact a merger or acquisition has on overall strategic values and financial metrics such as revenue growth and market share.

While this paradigm is unlikely to change, the growing need and importance of seamless supply chain integration is compelling "acquiring minds" to give it more consideration. The supply chain presents a ripe source for optimization. But many businesses either sour at the thought of investing the necessary time and money to efficiently and properly mesh supply chain links, or are simply ignorant of its importance.

As a result, expected synergies and financial gains are less than fruitful. A 2000 report by Arthur Andersen Consulting, Beyond the Headlines: A Survey of Lessons Learned from Merger and Acquisition Activity, points to this ineptitude. The study surveyed 31 executives from companies involved in M&A, to identify potential benefits and risks associated with these deals.

"The objectives considered most difficult to achieve commonly related to the integration phase of the transaction—reflected in the fact that 42 percent of respondents reported that their companies' handling of integration issues had been less than optimal," the report notes. These findings speak volumes as to the lack of initiative directed toward supply chain integration.

But times are changing. With economic concerns weighing heavily on corporate bankbooks and increased competition in the global marketplace, some companies are willing to change their approach if there is potential for significant cost savings.

"A fundamental shift in the ways in which companies compete is driving a new way of thinking," says Robert Sturim, director of integration solutions, Vitria Technology Inc., Mountain View, Calif., in his white paper, Achieving Competitive Advantage through Supply Chain Integration. "Today, rather than companies competing against companies, supply chains compete against supply chains. Effective information sharing means that you no longer have to own all the pieces of the supply chain to effectively operate as a single entity.

"And the ability to form the appropriate partnerships in a timely manner and effectively operate as a single entity allows some supply chains to thrive while others fail."

The Challenge

The supply chain is a complex web of intricate relationships within an enterprise and among suppliers, carriers, intermediaries, and vendors. From human resources to procurement, sales and marketing to carrier compliance, each component plays a critical role in any integration process.

Whether a company's motive is to acquire or gain new technology, add a new line of business, create value for the company, or simply bare necessity, successful supply chain integration initiatives must pay special care to every aspect of its core functions, while specifically addressing synergistic goals, cultural differences, and information technology gaps.

Creating Synergies

"A compelling drive to achieve synergies or cost savings is behind most merger decisions," says Keith Symmers, vice president of Best Practices LLC, a benchmarking firm based in Chapel Hill, N.C. "The supply chain is often a ripe source because a lot of redundant functions can be optimized."

Integrating disparate supply chains, however, presents many challenges. The difficulty or complexity of the task is often contingent on the direction and prospect of the M&A.

"A lot depends on the type of merger," says Symmers. "Mergers are done for different reasons. Many high-tech acquiring companies buy technologies they don't have in their portfolio—essentially filling in a technology. If that's the case, they probably have different sources and different suppliers and may not have as many synergies to achieve.

"But if the merger is being done for consolidation purposes or to absorb a competitor, it becomes a more compelling argument and a greater likelihood that significant savings can be achieved through the supply chain," he adds.

Measuring Successful M&A Activities

Respondents to the Andersen survey identified synergies and ROI (each 30 percent) as two metrics they most often used to measure successful M&A activity. This raises an interesting point. If synergies are so important, how come supply chain integration is a forgotten factor in many M&A transactions?

One simple answer is that since 2000, M&A dynamics have changed, and companies are paying more attention to supply chain initiatives.

"When you don't have the revenue growth as in the halcyon days of the economy," notes Symmers, "people shift their attention to cost savings and productivity improvement. That's where supply chain management is ripe for integration."

The other plausible reason, and a point that the Andersen survey correctly addresses, is the fact that supply chain integration often gets lost in the shuffle. Once a deal is completed it becomes an ancillary process. Of the four phases identified by the study as the most crucial to a successful M&A—Planning, Execution, Integration, and Evaluation—75 percent of those surveyed acknowledged that their integration phase lacked a clear process or policy.

As the survey results reveal, a majority of companies do not approach supply chain integration with a clear strategy. By simply planning for synergies and taking a proactive approach to optimizing supply chains quickly and efficiently, companies can spur even greater financial growth in the M&A process.

Culture Clash

Whenever two different cultures are brought together—be it a global summit among world leaders or a labor dispute between unions—it is important that everyone involved has a shared vision and is willing to work toward some type of resolution. It also requires a great deal of diplomacy to ensure that every party is able to express its concerns. The same discretion applies to companies that are acquiring business assets, or being acquired themselves.

While it may superficially appear trivial, a successful merger often depends on a successful marriage of corporate cultures.

"In the big picture when it comes to mergers, people look at corporate financial and strategic implications and reasons for participating in such a deal. The cultural aspects, however, are very important. If you have dissimilar cultures you will have integration difficulties down the road," says Symmers. "But often that's not going to scuttle a particular deal because companies are wise to those difficulties. They are also getting more bold and willing to walk away, either before a deal is struck or after, if it doesn't make sense to do it."

Part of this savvy can be attributed to experience. Companies that continually find themselves in the M&A flux are able to learn from prior transgressions and make sure those mistakes don't happen the next time around.

An Anthropoligical Approach

Paying particular attention to cultural integration can also greatly enhance and speed up the entire acquisition process, if due diligence is performed early on to address specific concerns and goals.

"Experienced integrators examine potential partners to understand leadership styles, decision processes, reward and incentive systems, compensation structures, team orientation, customer orientation, supplier orientation and other factors that reflect corporate culture," according to Best Practices in Supply Change Management and Partnerships, a white paper published by Best Practices LLC.

"Cultural due diligence prepares expert integrators for the

challenges and obstacles that must be overcome in order to successfully merge or acquire the partner company."

Some companies have even gone so far as to approach the task of cultural integration from an anthropological perspective—looking at ways in which humans interact with each other, in their work environment, and how they might adapt to change.

Regardless, most integrators begin researching possible cultural conflicts and ways to remedy these issues even before a deal is finalized. It's important that they build a communicative and open forum for exchange early in the integration process to ensure that the succeeding transition goes as smoothly as possible. With foresight, a comprehensive assessment of cultural similarities and differences builds a positive framework for successful integration down the line.

Insatiable Appetite for Technology Drives Many Mergers

The continuing evolution of information technology has created a M&A niche in itself. Much of the impetus for consolidation and acquisition in today's marketplace is, not surprisingly, driven by an insatiable appetite for leading-edge technology.

Better technology has also increased the competition between businesses, making acquisitions a staple diet for a healthy and robust global company. In effect, technology has created a feeding frenzy among companies looking to gain a competitive edge.

The Andersen survey similarly notes this trend. "Many respondents feel that they could not grow their businesses without maintaining, or increasing, the extent of M&A activity—particularly in view of the level of competition in existing markets and the pace of developments in technology. Technological advancement was cited as a very important driver of mergers and acquisitions by more respondents (63 percent) than any other factor."

Navigating IT Integration

But while IT integration is perceived as the most beneficial dividend to a M&A, it is often the most difficult and time-consuming phase of the entire process. If done poorly it can cause a deal to crash, or at the very least, incur significant time and financial costs.

"Merging two IT infrastructures is usually done in a phased manner,"says a 2001 paper, Solving the IT Systems Challenges in Mergers & Acquisitions, published by Vitria Technology Inc. "Converting, rather than replacing one company's applications into those of its merger partner are the norm. Yet, the longer the conversion takes, the more costly it is to the bottom line of the acquiring company."

As with all phases of integration, speed and simplicity are crucial to making an IT implementation as cost effective as possible. The sooner two disparate IT infrastructures can be linked, the sooner other operational efficiencies can be achieved. The learning curve for employees not familiar with the new technology must also be taken into consideration. Often the people who are best qualified to use these technologies and teach others are managers and IT people from the acquired company.

This no doubt relies on a successful cultural integration, allying the people with the know-how with the people who need to know. Only then can technology be successfully incorporated into the broader framework of a company's operations and services.

Time consideration also plays a critical role in how companies approach a M&A. Larger companies have a lot more at stake in terms of both risk and the challenge of integrating their facilities, technologies, people, and peripheral supplier, vendor, and carrier relationships.

Accordingly, the entire M&A process takes time—years, in some cases—to ensure a seamless and successful integration. "A more traditional company, be it a retailer or a pharmaceutical company, has huge infrastructure in place and it takes careful consideration and work to make the integration go well," says Symmers. "There are many more elements—people and geography, for example—that smaller companies don't have to deal with."

The Smaller the Company, The More Urgent Need for Speed

But while a smaller web-based entity, for example, may operate solely as a virtual company and outsource many of its functions, the urgency for a fast integration is conceivably greater. It is expected to be fast, and the pressure to meet these time- and cost-sensitive demands adds another factor to the equation.

"Typically, most larger companies do more acquiring than merging and they fold the acquired entity into their own system and operation. If it's a strong acquisition, they can leave it as a stand-alone, almost like a subsidiary," says Symmers. "More often than not, however, they look to create greater synergies by folding it into their existing supply chain systems."

Larger companies tend to have greater experience in dealing with M&A and often have full-time integration teams on staff to facilitate ongoing acquisitions. A smaller or newly established company that has had little or no experience in the M&A process is prone to making mistakes.

Ultimately, time is a mitigating factor in any M&A transaction. But while the size and type of company involved in the transaction often dictates the need for urgency, supply chain integration due diligence can greatly expedite the entire process.

Integrating Warehouses: A Game Like No Other

Faced with the challenge of incorporating a newly acquired distribution facility into its supply chain network, KBtoys.com turned to a warehouse management system to expedite the integration process.

When your business is shipping toys direct to consumers, you can't play around with your warehouse management system (WMS), especially if you're in the process of integrating a newly acquired distribution facility into your supply chain.

Just ask the folks at KBtoys.com. The online arm of KB Toy Stores—which operates more than 1,300 stores in 50 states—successfully bid for eToys.com's inventory and select assets and services as part of the auction process during the fledgling e-tailer's bankruptcy proceedings in early 2001.

The acquisition gave KBtoys.com a new 440,000-square-foot distribution center in Blairs, Va., in addition to its existing fulfillment center in Danville, Ky., to handle inbound and outbound distribution and the capacity to accommodate further growth.

But it also presented a unique challenge of getting the new facility up and running, staffed, and integrated with a new WMS in time to meet peak holiday season volume.

"There was no doubt that when we acquired the etoys name and access to its customer list that our volume was going to increase substantially," says Alison Castle, senior director of project management, KBtoys.com and eToys.com. "We realized immediately that we would have to step up our fulfillment and supply chain processes to meet those significant increases in volume."

Workers are busy fulfilling orders at the KBToys.com and eToys.com fulfillment center in Blairs, Va.

KBtoys.com offers consumers a wide selection of toys and video games for purchase through the Internet, thus relying on a highly efficient fulfillment process. With the holiday season looming, and faced with the prospect of incorporating eToys.com's distribution center into its supply chain network within a projected time frame of 10 weeks, the online retailer elected to use Manhattan Associate's PkMS warehouse management system to facilitate the integration process.

"We approached Manhattan Associates with our challenge in mid-August," says Castle. "It's a complex automated warehouse with a lot of MAG (conveyor) interfaces to be implemented and we expected a very high volume starting in October."

When it acquired the Etoys.com facilities, KBToys.com was already well ahead in the game. The e-tailer had conducted due diligence on several potential WMS candidates, including Manhattan Associates, the year before.

"We had actually looked at PkMS in the spring of 2000, and appreciated the system's functionality and depth," notes Castle. "We felt that PkMS could handle what we needed to do in the time frame for the new warehouse."

For its part, Manhattan Associates was also up to the challenge. "We put so much work into the development of the PkMS base product and increased the functionality to provide a product that can be upgraded with very little effort," says Brad Wicker manager of implementation services, Manhattan Associates.

Aside from the technology integration, KBtoys.com also had to quickly staff the facility with more than 150 full-time workers and an additional 300 seasonal associates to facilitate the holiday rush. Manhattan Associates complemented this effort by putting together a team of experts to help ensure that the integration phase went as smoothly as possible, notes Wicker.

"We have a number of people with WMS experience that can go out to a project and implement a system in 10 weeks," he adds.

The PkMS solution ultimately gave KBtoys.com the flexibility and efficiency it needed to start bringing products into the facility within its goal of 10 weeks, and begin shipping out of the new facility within 15 weeks.

"This was the result of careful planning, close partnerships, and Manhattan Associate's understanding of the industry and of our company's needs," says Castle. "The project was unique," adds Wicker "The gloves all came off and everybody worked as one team and accomplished an amazing goal."

With online sales expected to double as a result of the acquisition, PkMS gave Kbtoys.com the tools to meet its immediate demands in terms of cost and time, but also its longer-term goals of providing customers with the best service possible.

"The PkMS system significantly improves order cycle time and accuracy," says Castle. "It provides efficient inventory tracking capabilities so we know exactly where inventory is in that warehouse and what the quantities are. As a result, customers get the best information on what's available in that warehouse."

Given the nature of its business, this accountability is crucial to success. "The direct-to-consumer business requires a totally different fulfillment strategy and you personally have to be satisfied that a Barbie Doll, for example, gets to the customer's house. When we sell to customers, we're making a commitment to get that Barbie Doll to them in the time frame and condition they expect," adds Castle.

"When we look at our business and our success factors, we don't look at just the financial picture," she says. "Fulfillment to the customer is a huge portion of any dot.com's business and we need to be as successful in that area as any other portion of our business, whether it's our web site presentation, our financial bottom line, or the way we acquire products from vendors."

As the system matures, KBtoys.com will begin to reap other rewards. "PkMS helped KBtoys.com change the way it runs the former eToys distribution center," says Bruce Eicher, vice president, customers, Manhattan Associates. "It has enabled Kbtoys.com to operate as efficiently as possible, providing the company with a competitive advantage in today's crowded marketplace."

7 Steps to M&A Success

To ensure a seamless and successful M&A endeavor, companies should follow these seven steps, according to key findings from Best Practices' benchmarking study, Best Practices in Supply Change Management and Partnerships.

1. Develop clear priorities that target M&A opportunities offering profitable growth.

2. Identify the strategic value of the merger or acquisition before the deal is announced and support this vision with clear communication and organization throughout integration.

3. Build early consensus with merger partners or acquisition targets on future vision and strategic direction.

4. Identify a clear leader who can win resources, set direction and champion the integration's overall success.

5. Assess corporate culture in advance to identify cultural differences and similarities and develop comprehensive cultural integration plans.

6. Align forward-looking sales and marketing strategies with the synergies of a combined portfolio.

7. Carefully prioritize technology integration activities to ensure maximum cost efficiency and minimal operational interruption.

For more information about the study, see Best Practices on the web: www.best-in-class.com.

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