Supply Chain Due Diligence: Adding Value to Mergers and Acquisitions

2012 has proved to be another unstable year for M&A. Despite an encouraging start to the year, deal activity in terms of volume and value has not reached 2011 volumes.

For the 12 months that ended August 31, volume was down 7% and value was down 21%. Deal activity in every size decreased.

It is true that mega deal (transactions over $1B) activity remained relatively stable in terms of number of deals (117 YTD 2012 vs. 119 YTD 2011); however, deal value dropped $458B in 2011 to $322.4B in 2012.

It goes without saying that potential buyers will perform financial due diligence in order to value the deal and determine their bid strategies. Recently, the sale of Billabong, an Australian specialty retailer, came to an abrupt end when the last remaining bidder, TPG, withdrew its offer of a $715m bid. That withdrawal came just weeks after fellow US private equity fund Bain Capital withdrew from the race.

But now, more and more private equity buyers also engage in supply chain due diligence as an important step in the deal process. This includes pre-acquisition due diligence and post-deal assessments to determine the impact of supply chain integrations and business combinations. Private equity firms also understand the opportunity for value creation through supply chain improvements, which can result in improved operating margins, capital efficiency or revenue growth.

For private equity firms and their portfolio companies, supply chain assessments provide insights through a deeper understanding of: supply chain business processes; practices, methods and performance of business processes; operations strategy and organization; “as-is” and “to-be” scenario modeling; gap assessment and identification of initiatives to achieve the business strategy.

In 2013, it is anticipated that supply chain due diligence will continue to take on a more prominent role in PE transactions.