Supply Chain Issues Are Fueling M&A Transactions

The COVID-19 pandemic disrupted normalcy in several aspects of the world as we knew it, and one of the things hit especially hard has been the global supply chain. These supply chain problems have impacted nearly every industry and business, both large and small. Because of so much continued uncertainty in supply chains—uncertainty that is expected to last for years—business owners and executive leaders are reassessing operations and seeking paths to gain more control.

International trade has slowed, and supply chain bottlenecks and worker shortages persist. Previous overseas partnerships that were less expensive have become less reliable, leading to business losses. Some companies seek short-term solutions, while some have long-term concerns because of other global issues such as the increasing frequency and severity of natural disasters. Some business leaders are also looking for more permanent solutions in case there are ever border closings like there were during the height of the pandemic. As a result, many companies are moving facilities closer to home and closer to customers, and relocating plants to be closer to suppliers, even if it costs more. Some are even building their own facilities. Additionally, businesses have to be more creative in finding ways to source scarce raw materials and find skilled workers to keep business operations on track. 

A survey by NTT Data on the global supply chain crisis revealed that 68% of shippers feel that supply chains have become too global and need to be rebalanced regionally and locally. 

Increasing M&A Deals

These global circumstances surrounding supply chains and labor shortages are leading to an aggressive increase in mergers and acquisitions as solutions to these new-world problems. This year, we have already witnessed a hefty spike in M&A activity because of pent-up demand, cheap financing, plenty of liquidity, and record levels of private equity capital. But the global supply chain issues are causing companies to need to be much more strategic and resilient when it comes to operations. M&A transactions have always been a very effective way to achieve more secure supply chains, but today they are a more critical solution than ever before. Vertical integration of upstream links in the supply chain can improve the certainty of delivery, lower production costs, and boost profits. 

According to a recent survey by Deloitte, 69% of CFOs expect an increase in supplier diversification over the next three years, and 23% expect more vertical integration.

Results from another recent study (this one conducted by KPMG) indicate the following expectations of U.S. CEOs: 

• 49% reported that they would likely undertake acquisitions that will significantly impact their overall organization.

Transportation and Logistics Sector 

Because of the sweeping supply chain issues, there is a heightened demand for transportation and logistics companies—an appetite that is expected to remain strong into the foreseeable future. In the first half of 2021, the transportation and logistics deal landscape saw a whopping 86% growth in deal value compared to the first half of 2020. It is expected that there will be a continued focus on finding consolidation opportunities in this highly fragmented sector in order to create synergies and improve scale efficiencies.  

Supply Chain Now Impacting Valuations

Prior to the pandemic, due diligence in M&A rarely looked at supply chain health as a factor in valuations. But this has completely changed now that we see how long it is taking supply chains to recover in the time that the world has reopened for business. Today, a weak supply chain represents a major risk, resulting in a lower valuation. For a target firm to be seriously considered, there needs to be adequate diversity in origin, options, and shipping & transport methods when it comes to their supply chain. 

In a recent study, when asked how the pandemic has impacted their strategy and outlook, 21% of manufacturing executives considering M&A said they are focusing more on a target business’s resilience.

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