More companies are embarking on mergers and acquisitions, hoping to improve business performance and revenues. However, they also face unique challenges in combining multiple operations, particularly today.

Mergers and acquisitions (M&As) are an important reflection of broader economic conditions worldwide, providing particular insight on firms’ confidence about their financial future. Although M&A activity slowed significantly during the global economic downturn, it began to pick up again last year and continues to build momentum.

These mergers have the potential to reshape the business landscape, although combining companies poses a unique set of challenges.

According to a December report from tax advisory firm Ernst & Young, global M&A deal volume rose 3 percent through the end of 2010, while deal value rose by 26 percent, climbing to $1.9 trillion. Despite the promising gain, M&A value remained well below the all-time annual peak of $4.7 trillion in 2007. There was greater optimism in 2010, but most companies still moved cautiously in making acquisitions.

M&A growth occurred at significantly varied rates last year, with the strongest momentum building in the emerging markets versus more limited activity coming from developed markets. In the BRIC countries (Brazil, Russia, India and China) alone, M&A deal volume increased 6 percent and deal value surged by 46 percent in 2010, climbing to nearly $372 billion.

“As companies emerge from the financial crisis having cut costs significantly, a focus on growth has returned,” Steve Krouskos, global and Americas markets leader for Ernst & Young Transaction Advisory Services, said in an announcement of the findings. “The first step is a renewed focus on organic growth, the second step is acquisitions. All the fundamentals are there. Confidence just needs to return.”

Unsolicited bids reached 8 percent of total M&As in 2010, the highest share in 10 years, and more than half (58 percent) of companies said credit and capital conditions have improved in the past six months. Thirty-six percent of respondents to the Ernst & Young survey said that access to funding is not a problem for their companies, compared with 26 percent who said the same in April 2010.

However, confidence, a major driver of M&A activity, remains sluggish for the time being. Only 41 percent of firms plan to make an acquisition in the next six to 12 months, compared with 57 percent who said the same in April 2010. In the long term, 54 percent of companies plan to do a deal in the next one to two years.

“Confidence has been the primary restraining factor in deal activity over the past year,” Richard Jeanneret, Americas vice-chair for Ernst & Young Transaction Advisory Services, said. “Investors face uncertainty stemming from regulatory changes, austerity measures, unemployment, fears of inflation and European fiscal woes. Confidence and clarity are the missing pieces of the puzzle. Cash is burning a hole in the proverbial corporate pocket. But confidence and a lack of clarity on these issues are lagging, and economic uncertainty is holding M&A activity back.”

On a global level, the European debt crisis provoked serious hesitation over conducting M&As, while other financial problems have revealed underlying difficulties in the deal-making capacity of international economic systems.

“Sovereign-debt concerns have bedeviled deal makers since international attention focused on Dubai’s financial woes a year ago and Greece required a bailout earlier this year,” the Wall Street Journal reported in December. “Those concerns were added to a list of factors that were already slowing the gears of the acquisition machine in Europe, such as inflexible labor markets and the protectionist bent of a number of countries, including France and even increasingly England.”

Given the current economic climate, slowly but steadily accelerating M&A activity is putting added pressure on supply chains. Business professionals are increasingly looking to the supply chain to bolster financial health and add value, according to a report from supply chain consultancy Tompkins Associates.

“In the past, supply chain managers involved with M&A were often limited to focusing on short-term cost reductions and controls,” Gene Tyndall, the executive VP of Global Supply Chain Services at Tompkins, said in an announcement of the findings. “But today, there is greater emphasis on creating long-term benefits through the integration process. Competition between supply chains is more important now than competition between companies, and integrating supply chains the right way will create more business value than cost.”

However, merging supply chains can be challenging and it usually takes a significant amount of planning to be able to integrate multiple supply channels into a more profitable whole. Before a successful combination can occur, the merging companies must settle on a common set of metrics for measuring supply chain performance, establish a shared database or other system-consolidation project to bring together transactions and determine the degree of supply chain disruption a merger will create.

“After conducting an assessment, it is common to define a desired state, or how the resulting merged supply chain should look. Many corporations, however, make the mistake of trying to replace existing systems and processes all at once to achieve that desired state,” the Council of Supply Chain Management Professionals’ Supply Chain Quarterly cautions. “This strategy increases the risk of disruptions, especially in a post-merger climate. The assessment should indicate not just the end state but a series of steps to move toward that end state.”

Supply Chain Quarterly suggests establishing a joint team to evaluate both short-term savings and long-term productivity improvements involved in supply chain merging, and to make investment recommendations to optimize merger efficiency. The integration process itself should be a careful and comprehensive effort that avoids easy, temporary fixes to potential problems.

“Integration requires more depth and time than implementation, taking as long as 12 to 18 months to align both cultures and operations. Only in this phase should the tough organizational decisions within ‘merged supply’ be weighed,” Inside Supply Management explains. “Supply’s organizational redesign goes beyond headcount reductions and leverages both sides’ geographic reach, unique skills, true best practices and talent — but only if early involvement sets the stage for collaboration instead of ruthless disassembly.”

Earlier

Global Logistics M&As Slow to Near Halt

M&A Complexities in a Down Economy

Value of Industrial M&As Increases in Q3

Resources

2011 Ripe for Uptick in Deal Making if Confidence and Clarity Return…
Ernst & Young, Dec. 16, 2010

Euro-Zone Turmoil Depresses Deal Making
by Dana Cimilluca
The Wall Street Journal, Dec. 1, 2010

M&A Climate Challenges Supply Leaders
Tompkins Associates, May 19, 2010

When Supply Chain’s Merge: 5 Mistakes to Avoid
by Harpal Singh
CSCMP’s Supply Chain Quarterly, 2009

Achieve M&A Supply Synergy
by Stephen C. Rogers
Inside Supply Management, December 2010