Delivering Merger Synergy

After a quiet period of several years, merger and

acquisition (M&A) activity has gained momentum

across many industry sectors in 2005.

The interest in M&A activity never, of course,

disappearedвЂ"and with good reason. Accenture

research shows that high performance businesses

pursue growth strategies that juggle the shortterm

priorities of today and the organizational

and competitive demands of tomorrow. For many

companies, M&As have an important role in the

pursuit of that balance.

However, realizing the full synergy potential in a

merger is an uphill battle. Some studies have

noted that fully half of all mergers eventually fail

to create shareholder value, and less than 30

percent create value that is noticeably higher than

industry average returns.

Certainly, there can be many reasons why deals

have not lived up to expectations. In Accenture’s

experience, one of the most critical reasons is that

the companies involved typically did not pay

enough attention to supply chain issues across the

boardвЂ"whether it was during the pre-deal M&A

strategy process or during the actual merger

planning and subsequent integration.

The importance of supply chain to a merger’s

success is supported by the findings of an

international study team made up of researchers

from Accenture, INSEAD and Stanford University,

which was part of Accenture’s High Performance

Business research initiative. The research team

found that supply chain excellence is directly tied

to a company’s financial performance, which is

why top performers incorporate supply chain

management into their business strategies.1

Overall results bolster Accenture’s hypothesis that

the mastery of core competencies like supply

chain management is a critical component of

high performance.

The emergence of the supply chain

While not applicable for deals that are focused

solely on access to a new technology (such as those

in the high-tech and biotechnology industries),

supply chain excellence is particularly important

for merging companies that seek to achieve high

performance by expanding into new markets,

rationalizing distribution channels and consolidating

excess capacity. It is in these latter types of deals,

often involving two large companies, that mastery

of supply chain competency plays a critical role in

determining the success or failure of a combination.

Thus, the supply chain has emerged as an area

that can have a major impact on how a merger or

acquisition performsвЂ"especially when it comes to

costs. Indeed, the financial community evaluates

mergers on their ability to deliver cost synergies

to justify the deal because they are tangible and

easily measured. Because a company’s supply chain

is in many cases the most significant source of

cost synergiesвЂ"in some deals, it has accounted for

between 30 percent and 50 percent of synergiesвЂ"

effectively rationalizing combining companies’

supply chains is more often than not a prerequisite

to merger success.

Yet cost is not the only area in which the supply

chain has an impact. Through our experience and

analysis, Accenture has come to realize that the

supply chain is one functional area that has a

direct impact on all four major types of synergies

that can result from a merger:

1. Revenue. A superior supply chain

protects revenue during times of

transition by ensuring customer orders

are not interrupted and by enabling an

organization to generate stronger topline

growth in new products, new

markets and geographies.

2. 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.

3. Capital expenditure. Because the supply

chain often accounts for a significant