April 5, 2024 Supply Chain Disruption Continues to Steer M&A

Volume 27 | Issue 1

Following geopolitical uncertainties the supply chain is prone to more challenges calling for markets to build supply chain resilience.

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The supply chain is a critical component of any business that drives the production and distribution of products and services. Any level of disruption has the risk of significantly impacting the performance of the business. The COVID-19 pandemic led to a series of border shutdowns, resulting in challenges for markets heavily reliant on imports and exports of materials and products. As the global economy slowly began to recover from the after-effects of the pandemic, geopolitical tensions loomed in some regions, resulting in businesses grappling with severe supply chain issues.

Some businesses witnessed a steep downfall in their operations and economic performance, exposing deficiencies in their supply chain networks. Manufacturing processes slowed due to a shortage of materials, and distribution was significantly impacted. Supply chain availability became far more valuable, spurring deal activity. In the Global M&A Trends and Risks (2024) report released by Norton Rose Fulbright which highlights the takeaways about market trends after surveying more than 200 senior executives across multinational corporations, large private equity firms and major investment banks, supply chain came up as a key driver for M&A activity worldwide.

Government policy in the U.S. impacting supply chain

Due to the geopolitical friction between the United States and China, supply chain networks were disrupted. The supply chain was already undergoing challenges when China adopted its zero-COVID policies, partially influenced by political pressure. The situation worsened when the United States, in addition to the EU, increased tariffs on imports from China. As things escalated, panic set off among businesses heavily reliant on Chinese imports.

The world saw another conflict that changed the course of supply chain. In response to the Russia-Ukraine conflict, Russia also faced economic sanctions from the United States. These measures have led to supply shortages, especially in the oil and gas trade. With a similar response from the European Union, supply of oil and gas has been a challenge for both markets, but especially the European Union.

The U.S. government introduced specific initiatives aimed at boosting supply chain resilience. Most were in response to the pandemic and meant to address manufacturing and delivery challenges. The Congressional Supply Chain Caucus, the Chips and Science Act which is specifically focused on semiconductor chips, and the Supply Chain Disruption Task Force. These are some of the initiatives as a result of the United States’ shift in approaching supply chain. It is too early to assess how much positive impact these initiatives have had.

Sectors and regions most impacted by supply chain disruption

The problems with the global supply chain have severely disrupted businesses in the automotive and transportation sectors. In addition to the automotive sector, the United States and Canada witnessed disrupted in the electronics sector too. Europe saw a downturn in industries such as automotive and manufacturing.

Due to shortages in computer chips, automakers have found it challenging to meet the already pent-up demand for vehicles driven by labor shortages.

The impact on manufacturers within the semiconductor sector has had ripple effects in the technology industry, due o shortages in raw materials and production slowdowns. Other sectors, such as healthcare and retail, have also felt a substantial impact, leading to a slowdown. The impact of supply chain issues is prevalent across the globe. The emerging crisis in the Red Sea and the resulting increase in shipping costs and delays have further exacerbated supply chain concerns. Countries in Asia suffered an economic downturn due to a slower pace in the manufacturing and logistics sectors.

Businesses leaning towards strategic changes and M&A deals to mitigate effects of supply chain disruption

The U.S. policy, in response to geopolitical tensions, has forced businesses to explore options for securing reliant supply chain networks. With limited external solutions, most businesses are considering operational over-haul, reshoring, and near-shoring. Companies are engaged in reshoring by finding logistics solutions within the domestic market. Near-shoring, on the other hand, is an approach to finding solutions within the geographic area where most of the consumer demographic is concentrated.

Recently, businesses have also turned towards embracing digital transformation. Increased investment in the automation of warehousing and supply-chain planning is trending. As the respondents in the report indicated, the ongoing pursuit of digital transformation and the increased demand for deals are among the key drivers of M&A activity.

Businesses are more inclined to acquire or merge with players in transportation and logistics industry to support their vertical integration goals. Not many businesses are inclined towards working with third parties to facilitate supply chain. The urgent need for maintaining a resilient and reliable supply chain process is driving the deal market.

As the report notes, businesses are looking to boost supply chain and attain inorganic growth through vertical acquisitions. This trend will bolster supply chain resilience amid geopolitical friction and world-shifting pandemics. The benefits of such deals include improved sustainability and the ability to drive faster growth.

Companies that are not actively considering vertical deals as a solution to address supply chain disruption are looking to build capability and transform their supply chain designs so that they have more ownership over the different phases of production. More businesses are relying on artificial intelligence to design sophis ticated channels for foolproof supply chain process.

Vertical Deals Triggering Government Scrutiny

Vertical deals are not without their own problems; they are drawing regulators’ attention globally. As indicated in the report, national security and antitrust regulations have tightened. Antitrust agencies are scrutinizing the potential of vertical deals to limit the market for participants operating in the logistics sector. Big-scale businesses in different levels of the supply chain that are parties to such deals are seen to harm other businesses’ ability to compete. In the U.S., for example, the merger guidelines 2023 expressly target vertical transactions, raising the probability of lengthy deal closings. In addition, antitrust agencies across countries are initiating cooperation with each other, posing the risk of an increased review period for deals, including vertical deals. The European Commission, for example, recently indicated that it is working with competition authorities worldwide.

Despite the evolving regulatory landscape concerning vertical deals, the deal market continues to feature strategic moves by businesses looking to develop supply chain resilience. This trend will likely dominate the first half of 2024, resulting in more deals in response to supply- chain disruption.

Ayşe Yüksel Mahfoud is Norton Rose Fulbright’s Global Head of Corporate, M&A and Securities.

Aara Tomar provides corporate advice to business owners and entities in mergers and acquisitions and private equity transactions.

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