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The results of a Tompkins Supply Chain Consortium survey show that as the service supply chain industry evolves, great opportunities exist for the private equity community.
 Global mergers and acquisition (M&A) activities are expected to jump 36% this year, reaching an estimated $3.04 trillion, according to Thomson Reuters and Freeman Consulting Services’ November 2010 report. The M&A market, which hit its peak in 2007 at $4.28 trillion, has been severely impacted by economic downturn.
However, this year’s buyers are expected to be more strategic in their acquisitions compared to previous buyers who focused on distressed companies and value deals.
Service supply chain space has recently gained attention as a profitable growth opportunity for many industry players. At the same time, the service supply chain industry is in an early stage of evolution. The industry consists of mostly small- and medium-size companies (many of them are very entrepreneurial in nature) and currently lacks the presence of major dominant players.
The highly fragmented nature of the industry presents a unique opportunity for not only the companies in the service supply chain area, but also for private equity firms who have primarily ignored this industry.
For a deeper understanding of the dynamics of M&As in the service supply chain industry, the Tompkins Supply Chain Consortium recently conducted a survey with the following objectives:
- Understand market readiness for M&A in service supply chain.
- Recognize the key drivers for M&A in service supply chain.
- Identify the interested parties and their source of funding.
- Determine the long-term vision of the industry.
The survey received responses from a diverse mix of companies that perform various activities in service supply chain. Figure 1 shows the percentage of respondents in these various activities.
Market Readiness:
Data points collected through the survey reveal the level of readiness of service supply chain companies for M&As and their executive involvement, as listed below:
- Overwhelmingly, 70% of respondents believe that repair and refurbishment companies are most ripe for M&As, followed by 46% of recycling companies and 38% of component harvesting companies.
- The majority of respondents (85%) agree that strategic intent is the main driver, with the next main driver being financial benefits (54%).
- Interestingly, none of the respondents see government regulations or access to government funding as a driver for service supply chain M&As.
- It is also important to understand a company’s readiness, their executives’ involvement and the best time for engaging in M&A activities. Figure 2, Figure 3 and Figure 4 illustrate these responses:
The role of participating organizations’ supply chain function in M&A activity is characterized below by Figure 5:
Government’s Role:
The government’s role has been a topic of many discussions in service supply chain, not only due to sustainability and environmental impact, but also because of the creation of economic activities in the space.
An example of government playing role in services supply chain is the “extended producer responsibility” (EPR) strategy, which holds equipment manufacturers responsible for ensuring that their products are recycled or disposed of in an environmentally friendly manner after completing their useful life in the field.
Another key government initiative which is gaining momentum at the federal level is banning e-waste export. This initiative has dual intent:
- Ensure that e-waste does not end up in the hands of irresponsible parties in developing countries where unsophisticated processes are used to harvest precious metal. These processes have severe short- and long-term impacts on the health of workers involved.
- Create indigenous industries to process e-waste which can help local economies and create jobs.
Following are the data points captured from the survey on the topic of the government’s roles in driving mergers and acquisitions in the service supply chain:
- Nearly half (46%) of respondents think that EPR will have a positive impact.
- Thirty-eight percent believe the federal initiative to ban e-waste export may have positive impact.
Interested Parties and Source of Finance:
It is important to understand the active players in M&A activities in the service supply chain. Below are a few highlights:
- Buyers, acquisition targets and other investors are three prime categories of players who are most active in M&A in service supply chain.
- Private equity firms are neither active nor pursuing any M&A activities in service supply chain, which raises a very interesting question about whether private equity firms do not see the value, or if they lack understanding and do not wish to participate.
- More than 60% of companies expect M&A activities will be funded internally, (i.e., cash or stock swap). Only 23% think they will be funded by private investors.
Long-Term Vision:
As the topic becomes mainstream, companies in a variety of industries are not sure where to begin. New leaders are emerging and existing companies are moving into leadership roles to fill the necessary gap. Survey results suggest that nearly 40% of respondents believe that an existing technology company will lead the industry in the future; another 40% anticipate a new leader will emerge.
This expectation creates growth opportunity for existing players, as well as for potential entrants with vision and desire. Considering the evolution of an industry, it will be interesting to watch the reaction of the financial community, including whether or not private equity firms become involved.
Survey Results Summary
As the economy rebounds, M&A activities are expected to return to their pre-recession levels, and service supply chain presents a great opportunity to participate in this increased M&A activity. A few key takeaways from this survey include:
- More than two-thirds of respondents see repair and refurbishment companies as prime targets for M&A. Strategic intent and financial benefits are also noted as key drivers, and nearly 40% believe that 2011 is the best time to engage in service supply chain M&A activity. But, surprisingly, private equity firms do not seem to be very actively participating in this arena.
- As the service supply chain industry evolves, this could be a great opportunity for the private equity community to become involved in this industry’s growth. Additionally, there was an equal divide on whether respondents believed that existing technology companies will lead the way or if a brand new leader will emerge.
- Overall, as service supply chain gains momentum, there will be opportunities for current and new players to achieve a greater extent of sustainability and profitable growth.
About Tompkins Associates
Tompkins Associates designs and integrates global end-to-end solutions for companies that embrace supply chain excellence. For more than 35 years, Tompkins has evolved with the marketplace to become the leading provider of global supply chain services, distribution operations consulting, technology implementation, material handling integration, and benchmarking and best practices. Headquartered in Raleigh, NC, the company is known for innovative, practical solutions that improve supply chain performance and produce value-based results for food and beverage companies. For more information, visit www.tompkinsinc.com. Subscribe to Tompkins Associates' RSS feed for up-to-date information.
This article is available for reprint with attribution. If you would like more information or an interview, please contact Keri McManus, (919) 855-5516. |
