How companies can use M&A to tackle supply chain problems

While the worst of the uncertainty caused by Brexit and COVID-19 may have passed, UK businesses still currently face a huge array of challenges. These crises continue to have lingering effects which companies will have to traverse in the short and medium term.

One of the biggest of these issues is major ongoing supply chain disruption across many industries.

A range of different factors have contributed to a fully-fledged supply chain crisis. Brexit and COVID-19 have both played their part, the former by severely disrupting the UK’s access to labour and goods from the continent, the latter by creating a situation in which lagging supply has been followed with resurgent demand leading to goods shortages (the ongoing semiconductor crisis being perhaps the most notable example). Geopolitical uncertainty is also increasingly factoring into this.

These issues have all fed into and helped to exacerbate supply chain-related problems, such as growing shortages of raw materials and labour, rising prices throughout supply chains, increasing fuel costs and longer fulfilment times. This has resulted in supply chains that are slower, less efficient and more expensive, with the issue an increasingly common feature in recent company administrations.

On top of this, businesses are under growing pressure to ensure that their supply chains are more sustainable, as regulations on environmental, social and governance (ESG) tighten and sustainability becomes an ever more vital consideration.

A KPMG survey found that US CEOs consider supply chains to be one of the current biggest threats to growth, alongside climate, cybersecurity, reputation and taxes. In order to navigate this challenge, a large number of businesses will be viewing supply chain optimisation as one of their key goals for 2022, leading to forecasts that companies may turn to M&A activity in order to help them achieve this.

How can M&A help strengthen supply chains?

Faced with supply chain disruptions, companies will aim to take the best possible measures to both get around these problems and to guard against them recurring in future. This is a process referred to as “supply chain optimisation” and M&A is among the most efficient, quickest and most reliable ways that companies can achieve this.

Companies looking to optimise their supply chains may target acquisitions that help to secure vertical elements of their supply chain (so, for example, this could mean acquisitions focusing on securing raw materials or on distribution), or may seek acquisitions that help bring vital elements of their supply chain closer in order to reduce fulfilment times.

Technology, of course, plays an increasingly prominent role in supply chains at essentially every stage. Acquiring technological processes that help to drive supply chain optimisation and efficiency can also be a core part of a supply chain-focused acquisition strategies.

Finally, as supply chains start to be more and more scrutinised over sustainability concerns, regulations and ESG, acquisitions of companies that offer both supply chain solutions and green credentials can help businesses to ensure that their supply chains are more sustainable and in line with an ever-tightening legislative landscape.

Major trends in supply chain M&A

Vertical integration
As mentioned above, the key trend that is driving supply chain M&A is vertical integration, with an outlook on dealmaking in 2022 from PWC naming this as one of the key trends in M&A this year and a Deloitte survey revealing that 23 per cent of CFOs expect an increase in vertical integration over the coming three years.

Simply put, vertical integration in M&A means acquiring businesses or assets either further up the supply chain (for example, a company that supplies your business with a raw material or product component that your business then sells on) or further down (for example, acquiring a company that distributes or sells your products).

Vertically integrating businesses further up a supply chain can be a highly-effective method of ensuring that a company doesn’t suffer from issues such as shortages of raw materials or pay a premium due to escalating costs at a supplier. Using this method, a company can gain greater control of the supply side of its business, improving delivery, lowering costs and ultimately bolstering profits. In some cases, such as with Swedish furniture firm Ikea, a company may seek to gain total control over their supply chain.

Meanwhile, vertically integrating downwards, can help a business to ensure that its products are being distributed or delivered more efficiently and, again, with greater oversight. Acquiring, for example, a delivery provider and integrating it into a company’s offering as a dedicated service can both save costs on hiring a third-party partner and potentially enable the business to charge more for more comprehensive, specialised delivery.

As well as delivering operational and financial benefits, vertical acquisitions within a supply chain can also help companies to gain greater market share, acquire valuable assets such as plant and distribution space and develop a better understanding of their products and market.

Corporate Trade Supplies UK (CTS UK) is a North Yorkshire-based business specialising in workwear, personalised uniforms, promotional products and hygiene products. However, the company has aspirations to become a far more wide-ranging, comprehensive supplier and one of the key ways it is looking to achieve this in 2022 is by using M&A to gain greater control of its supply chain.

In April 2022, CTS UK made a huge stride towards this, acquiring personal protective equipment (PPE) brand Safeguard Supplies in a £3 million deal. The deal, described as “game-changing” by managing director Howard Gill, will mean that the company not only rapidly expands its business in the UK, it also means that it is now dealing directly with supplier factories in the Far East, representing a major vertical integration within its supply chain. According to CTS UK founder and Chairman AJ Swinbank, the acquisition is not the last the company will make in 2022. Swinbank said: “This is unlikely to be our last acquisition this year as we look to expand our production arm of the business and tighten control of our supply chains.”

Tech uptake
For decades, logistics was a predominantly physical space, reliant on paperwork and physical assets. However, over recent years, technology and digitalisation has helped to drive greater efficiencies and cost savings within supply chains, making them heavily reliant on technology.

Technology is now central throughout supply chains, with the digital logistics market worldwide expected to be valued at around £36.5 billion by 2025, compared to £13.6 billion in 2020. Supply chain technology enables better visibility of elements such as inventory and forecasting for potential problems and developing trends. This allows managers to gain greater oversight, improve decision making and solve problems more quickly and efficiently.

Emerging technologies are now taking this to new levels. Machine learning tools are able to analyse data from a range of sources to produce more accurate demand forecasting, which can help companies to more efficiently manage and replenish inventory and can potentially cut supply chain errors by up to 50 per cent.

AI, meanwhile, can automate time-consuming routine tasks and augment others that need to be performed by humans. This enables greater visibility and integration within networks, streamlining supply chains, reducing costs and helping to detect patterns. Furthermore, robotics are increasingly driving efficiencies in warehousing, reducing labour costs and fulfilment times, while giving staff more time to focus on driving further improvements.

These are just some of the ways emerging technologies can help to improve efficiency, speed and cost-savings within supply chains, but there are many more. Technology is now inextricable from supply chains and its importance to them grows every day. Many of the companies driving this digitalisation are start-ups and smaller, disruptive tech companies. Acquiring such dynamic companies and their cutting-edge technologies could prove to be an integral strategy for businesses looking to secure, improve and future-proof their supply chains.

In 2021, Texas-based supply chain technology firm E2open announced that it had agreed a deal to acquire BluJay Solutions, a Manchester-headquartered firm providing cloud-based supply chain software and services, including platforms for freight transport management and global trade compliance.

The deal, valued in total at around $1.7 billion (£1.34 billion) significantly expands E2open’s supply chain offering, adding new services and, perhaps more crucially, deepening its use of technology such as data analytics, enabling greater visibility, improved insights for customers and better decision making.

Commenting on the deal, E2open CEO Michael Farlekas said: “The acquisition of BluJay is a continuation of our strategy to offer the broadest and most data-rich SaaS supply chain platform. The largest and most iconic global brands are re-imagining their supply chains to be more agile, more resilient, and reduce their environmental impact. E2open now offers more extensive capabilities, timely data, and continued innovation to help them accomplish their strategic objectives.”

Onshoring/nearshoring
The diffusion and globalisation of supply chains has been among the key drivers of international commerce over recent decades. However, this has also led to a situation in which many supply chains have become overly complex, costly, inefficient and unbalanced. According to an NTT Data survey examining global supply chains, 68 per cent of shippers feel that supply chains are now overly-global and require rebalancing towards a more local and regional approach.

In the UK, COVID-19 and Brexit have helped to expose an over-reliance on global supply chains, leading to situations such as the current, ongoing undersupply of some products and serving as a major contributor to the escalating cost of living crisis.

As Brexit and the pandemic cause prices and fulfilment times to rise, companies have often had to resort to passing costs on to the consumer. In many cases, however, this hasn’t been enough, with factors such as rising import and export tariffs post-Brexit and delays in securing vital components and raw materials being key factors in escalating insolvency figures, particularly in sectors such as construction and retail.

This situation has followed decades of offshoring and outsourcing as businesses sought to reduce costs by relocating key processes to companies or facilities in other countries. However, as firms now look to strengthen, improve and gain greater control over their supply chains, many are forecasting trends for onshoring or nearshoring.

In other words, companies may look to move key processes closer to home, either to a nearby country or to the UK itself. In order to achieve this, buyers could target acquisitions of companies or assets located domestically or in neighbouring countries, potentially using disposals of international subsidiaries or assets to help fund this.

There are many logical reasons for onshoring or nearshoring parts of a supply chain, perhaps primarily the simple fact that moving supply closer to the source of demand can prompt a dramatic reduction in lead and fulfilment times. This can make supply chains quicker, more efficient and less vulnerable to the potential uncertainties inherent in an overly-global supply chain (uncertainties highlighted/exposed by Brexit and COVID.)

What issues do companies face as they seek to secure supply chains?

Global uncertainty
Even though the UK is now firmly in the post-Brexit period and, seemingly, unlikely to continue using lockdowns as a response to the COVID-19 pandemic, uncertainty is still rife throughout the world and this can naturally make planning and executing supply chain optimisation successfully a difficult process.

For example, with Europe now increasingly ravaged by Russia’s war in Ukraine, companies that had considered nearshoring elements of their supply chain to mainland Europe (for example, Poland, which has strong links with the UK but also borders Ukraine), may now consider this too risky. Both because of the conflict as it stands and amid the potential threat that the war may escalate. Nearshoring operations to Europe also, of course, means companies are more exposed to post-Brexit legislation, as well as the different COVID-19 measures other countries may adopt as the pandemic evolves.

Such issues may mean that companies seeking to bring parts of their supply chain closer may resort to onshoring in order to avoid the many uncertainties within the EU. However, as we covered in last month’s insight, the UK logistics sector is experiencing a huge boom in demand. Meaning that companies may struggle to acquire UK-based assets and face paying a premium in order to do so.

ESG
As climate awareness and the scrutiny of business ethics becomes more intense, companies are likely to come under growing pressure to account for the environmental and social impacts of their supply chains, including from customers, stakeholders, environmental groups and regulators.

According to one calculation, supply chains can account for up to 90 per cent of a company’s carbon footprint. As authorities look to set tighter ESG regulations, it is increasingly likely that businesses will bear more responsibility for emissions within their supply chains.

While this is not immediately on the horizon within the UK, the EU has proposed legislation which would make ESG due diligence for supply chains mandatory, including for non-EU companies with significant operations within the bloc. If companies fail to conduct supply chain due diligence under this legislation, they could face penalties or even disbarment.

This is a trend that is only going to grow over the coming years, so businesses that are looking to optimise their supply chains will increasingly have to start factoring ESG into this process. In some cases, this may not be problematic. For example, if a company is looking to onshore its operations, this could mean a lower carbon footprint and better sustainability credentials.

However, there are other scenarios in which it may pose difficulties. For example, if a company seeks to nearshore elements of its supply chain to a nearby EU country, they may find themselves subject to a potentially more stringent EU ESG regime. Overall, ESG regulations and pressures may mean that companies are pushed towards supply chain solutions that are not as cost-effective as others.

Valuations and buyer due diligence
The disruption caused to supply chains over the past two years means that they now form a fundamental part of a business’ value. If a company doesn’t have a resilient supply chain, then this must necessarily be reflected in its valuation.

Prior to the pandemic, this was perhaps less of a concern, but businesses with weak supply chains have been brutally exposed and their vulnerabilities made clear over the past two years. Naturally, this will mean that supply chains form an increasingly integral part of business valuations and due diligence in M&A over the coming years.

On the buyer side, due diligence will need to look far more closely at the state of a target company’s supply chain. This may include things such as, its resilience to geopolitical uncertainty, its exposure to shortages of labour or raw materials, fulfilment times, technological integration and, of course, its environmental impact. For buyers, this adds a considerable (but now vital) workload to the due diligence process that may previously have not been undertaken with as much scrutiny.

Sellers, meanwhile, will have to contend with a marketplace in which their supply chain is a key element in how potential buyers value them. Any weaknesses, problems or inefficiencies within a supply chain will result in a lower valuation and owners will have to weigh up whether to accept this or to invest time and capital in optimising their supply chains pre-sale.

Despite the impacts of Brexit and increasing climate awareness, businesses prior to the pandemic were probably content with their supply chains, so long as goods arrived in a relatively timely manner and costs didn’t rise too rapidly.

However, the pandemic highlighted in incredibly stark terms the fragility of the supply chains that many UK businesses relied on for day-to-day operations. Moving forward, businesses will be under growing pressure to invest in optimising, digitising and improving the sustainability of their supply chains, with M&A sure to play a major part in these efforts for many companies. Failure to do so could impact a company’s profits, valuation and potentially even pose serious regulatory implications.

Also read:
Logistics firms targeting acquisitions despite falling confidence

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