In the second installment of this ongoing series, Tom Ewers and Roland Wilson of West Monroe Partners discuss the key ingredients manufacturers and distributors need to complete comprehensive operational and IT diligence. To read the first entry of this series, click here.
Once the details of a manufacturer or distributor’s (M&D) acquisition and integration strategies are mapped out, it’s time to execute. Like any major project, success begins with getting the right people on the team.
1st – Establish your Diligence and Integration Team
While multiple areas for synergy for the investment may exist, trying to achieve all can be extremely difficult, especially for businesses that don’t fall under the “serial acquirer” label. Organizational know-how, resource capacity, and M&A (mergers and acquisition) leadership are often the biggest barriers to success. Adding M&A leadership with industry and cross-functional operational expertise to your team may be necessary.
For M&D, manufacturing operations are core competencies that must be assessed in detail via due diligence, whereas a third-party warehouse location may not warrant a deep-dive review. However, a distributor’s core competency, by definition, is distribution. Based on the initial integration envisioned, it’s important to prioritize your diligence plan towards the primary value drivers and sources of risk with the transaction. It’s wise, however, to build a plan that identifies collaboration potential beyond these key areas – that’s where unanticipated upside can result.
Conversely, there are frequently critical business issues or risks that may not yet have been identified – the sooner known, the better the chance of minimizing negative financial impact. This requires building a comprehensive diligence approach and identifying employees and/or advisors to evaluate all of the functional and technical areas that will be impacted during the integration.
2nd – Perform Targeted Operational Diligence
Operational diligence is crucial to understanding the environment you’re acquiring. This will:
- Directly impact feasibility of your integration approach;
- Enable you to quantify the anticipated synergy; and
- Help identify risks that may affect operations post-close.
- Manufacturing and/or distribution capabilities;
- Business processes, such as planning and procurement; and
- Trading partners or overall supply chain.
- Establishing a shared visibility into sales and marketing activities;
- Finding sourcing and procurement commonality; and
- Producing consolidated financials.
- Systems consolidation;
- Data migration; and
- Implementation of shared business applications and infrastructure.
The operations review also provides insight into the target’s:
Whether the strategy is to fully integrate or maintain separate facilities, a rigorous process review enables the acquirer to identify resources, best practices, similarities, and areas for improvement that can be used to update the integration approach. The operational diligence is an important step to accurately identify revenue enhancement and cost take-out opportunities as well as integration cost estimates, which all need to be validated and captured during the post-close integration.
An operational review can be performed at a qualitative and quantitative level – both are valuable. Depending on the accessibility and time to close, however, the ability to conduct a full quantitative analysis can be difficult to accomplish without the right amount of target data.
Despite those challenges, going “three layers deep” by interviewing key management, supervisors and subject matter experts across each function enables you to gather a comprehensive and evidence-based perspective to support the qualitative opinion. In the absence of quantitative data, this anecdotal context can still support original synergy calculations, identify cost takeout opportunities, estimate integration costs, and formulate initiative priorities for the 100-day plan post-close.
Third – Invest in comprehensive IT diligence
While manufacturers and distributors are not always thought of as “high-tech,” information technology’s importance in supporting core processes and providing timely and accurate data is significant. Evaluate online marketing, e-commerce portals, mobility, social media, and data analytics. These are key technologies.
Fully assimilating systems may not be the primary goal of integration, but these elements are important to a post-integrated enterprise:
To achieve this, these technology integration activities must be executed:
Planning and execution systems are vital to M&D operations. On the front end reside engineering tools and product configuration applications that run the bulk of company’s operations. Forecasting, planning, and scheduling software is another box to check, fulfilled with enterprise resource planning (ERP) modules or best-of-breed commercial off-the-shelf packages. Manufacturing execution, lab information and quality assurance, as well as warehouse management systems and transportation management solutions can also be critical to M&D operations.
The physical infrastructure activities that need to be performed such as consolidating networks, phone systems, email, and data centers can take an unexpected amount of time and effort to achieve across the enterprise. Unfortunately, these tasks are often overlooked or simplified. Without proper IT diligence discovery and planning for these activities, they can act as a constraint, as well as unanticipated cost, to realizing the transaction’s overall goals.
To read the first entry of this series, click here.
(In the next installment, Tom and Roland will be back to discuss the ins and outs of pre-close integration planning for M&D mergers and acquisitions.)
About the Authors
Tom Ewers is a director with the management and technology firm West Monroe Partners. He is responsible for expanding presence in key local industries – particularly healthcare, manufacturing and distribution, and private equity – throughout Minnesota and the upper Midwest and coordinating services for national and international clients with operations that region. Roland Wilson is a director in the firm’s M&D practice. He has more than 20 years’ experience in industry and business consulting. He focuses on helping clients achieve post-merger integration synergies and/or business transformation objectives. Visit West Monroe Partners at http://westmonroepartners.com.