• Michael Shaw

Building Supply Chain Resilience for M&A

The COVID-19 pandemic has exposed vulnerabilities in supply chains that are impacting M&A transactions across a variety of industries.

The topic of supply chain stability came to the fore at the onset of the pandemic when toilet paper suddenly became a hot commodity. It really just boiled down to a supply chain issue that proved to be part of a broader trend. From toilet paper to semiconductors, COVID-19 has revealed numerous supply-chain vulnerabilities that can rear their head during M&A due diligence or after a deal is closed.

As the U.S. economy reopens and business activity picks up, supply chains around the world are being tested. And the stakes are high, because COVID-related supply chain constraints could affect financial performance. If product cannot be shipped, then sales, profitability, and potentially valuations will suffer. According to the consulting firm McKinsey, a pharmaceutical company could lose up to a quarter of its EBITDA from a supply chain shock that disrupts operations for one month.

Last year, many companies were concerned about the loss of sales due to coronavirus-driven shutdowns. However, just because people are getting vaccinated and economies are reopening does not mean we are out of the woods yet. The lingering effects of COVID-19, including variants of the virus as well as unforeseen supply chain issues, could affect operations through 2021.

All this must be considered when companies are pursuing a deal.

Fortunately, a disciplined M&A strategy can help mitigate the risk that a supply chain shock disrupts operations and negatively impacts a transaction.

Improving Supply Chains

As those in the field know, supply chain forecasting is hard. Here is what can be done to ensure supply chain hiccups do not derail an M&A transaction:

  • Buyers, sellers, and M&A advisors can start by making sure the right people with extensive supply chain knowledge are in place—after the deal is completed—and trusted to handle forecasting, planning, execution, and challenges that arise.

  • Have mitigation and business continuity plans in place.

  • Accurately predict inventory. In the short term, focus on shoring up shortages of critical goods. Flexibility is key to adjusting as needed.

  • In the longer term, focus on quantifying risks. Think of it like buying insurance by accounting for potential losses from a lack of resiliency measures.

  • Take a full view of supply chain vulnerability to build resilience into supply chains before the next shock hits. Set a vision for the supply chain during the due diligence phase.

  • Diversify suppliers since it is risky to rely on a single company for sourcing.

Deal participants should be well prepared for potential supply chain issues. Those who are actively executing a disciplined M&A strategy will be rewarded when it comes time to close a deal. By establishing plans now and effectively managing what is controllable, buyers and sellers can successfully navigate this increasingly common M&A challenge.

The adage “never let a good crisis go to waste” rings true here. COVID-19 has proven that, now more than ever, we have to be thoughtful about establishing and executing M&A strategies that account for resilient supply chains. It has given executives an opportunity to transform their supply chains.

As an advisor to both buyers and sellers, Copper Run helps ensure robust supply chain strategies contribute to successful transactions. If you would like more information about how supply chain issues may impact your business going forward, please contact Copper Run for guidance.

Matthew Roberts is Director at Copper Run. He specializes in the business services, distribution, and manufacturing sectors.

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