The cross-border component of M&As among import-export companies transcends simple arithmetic. The changes post-merger can sometimes be minimal and at other times quite profound, setting off unexpected impacts.
There were more than 40,000 mergers and acquisitions worldwide last year, totaling almost $4 trillion, and it would be hard to find a deal of any size that didn’t cross borders in some fashion. Asian corporate investors are increasingly looking toward Europe, while more European capital is flowing into the United States, all in efforts to expand markets and product offerings.
Deals affect the amount and flow of goods that are imported and exported, and the supply chain that moves them. Sometimes, the changes post-merger are minimal; sometimes, they can be quite profound.
“They take a lot of different forms and shapes,” said Michael Meierkort, Chicago-based president international freight and transportation solutions at Livingston International, an end-to-end supply chain service provider.
The cross-border component of M&A transcends simple arithmetic, however. The goal is far more than the creation of a company that imports or exports more than it did in the past, although increased volume is certainly a factor. Part of the acquisition rationale is to increase efficiency, eliminate redundancies and reduce overall costs. That process can impact everything from shipping lines to distribution centers, 3PLs to software providers.
“A supply chain is very complex to begin with. After a merger, there are that many more parts,” said Meierkort, who added: “I’ve never seen a merger where there isn’t some kind of change.”
On top of all this are shipping industry mergers and acquisitions themselves. These have “created a lot of disruption,” said Meierkort. “There are changes in shipping patterns and what ports are utilized.”
What’s more, Meierkort and others stress, the pace of post-merger transformation varies from one deal to another. Sometimes, the effect is almost immediate; other times, it can take years.
Take the $59 billion merger of Dow Chemical Co. and DuPont, announced in December 2015, approved by shareholders last July and expected to clear regulatory hurdles sometime this year. This will create America’s largest chemicals-related company, with revenues of more than $80 billion, and one that is also truly global. Dow Chemical, for example, gained almost two-thirds of its revenues from outside the US in 2015.
Even after approval, the merger doesn’t mark the end of this corporate reengineering. Dow and DuPont plan to divide the combined company into three separate and independent corporations: agriculture, specialty products such as nutrition and health and material science, which will hold the traditional bulwark of chemicals and plastics.
According to sources, the companies didn’t begin to attempt to tackle the future of their supply chain for months and Dow Chemical and DuPont continue to maintain separate logistics groups. Only now are they beginning to send out requests for proposals on the transport and handling of the merged company.
A mega-merger like Dow Chemical and DuPont can also create or contribute to a snowball effect, with profound global implications and possibly dramatic shifts in supply patterns. Last February, China National Chemical Corp., or ChemChina, announced it would acquire for $43 billion the Switzerland-based Syngenta AG, the world’s largest agrochemical manufacturer and a major seed producer as well. It’s also the largest-ever foreign acquisition by a Chinese company, and reflects China’s concerns about food security. It’s one of many food-related acquisitions by Chinese companies abroad.
Then, in October, Bayer AG announced it would pay $66 billion for Monsanto Co., creating the world’s largest supplier of seeds and pesticides. In this round-robin merger tournament, Monsanto had one year before attempted to buy Syngenta and had been rejected by the Swiss company.
Merged companies must maintain a balancing act in just how they wield their enhanced clout. On the one hand, they can use their bigger volumes and economies of scale to demand better terms and conditions from carriers, distribution facilities and logistics handlers. Certainly, companies post-merger will attempt to consolidate transport and handling if, for example, both companies had shipped garments from, say, Shanghai to Los Angeles.
But merged companies also must be careful not to disrupt supply chains. Customers are often leery of mergers and the turmoil these can many times bring. Competitors of the merged companies often leverage this concern in efforts to take away business.
That care must extend to the actual suppliers as well. Especially when it’s an acquisition by a much larger company of a smaller one, there’s a temptation to go in and fiddle with the acquired company’s supplier base, whether in the name of cost-cutting or consolidation of sources. That can lead to disruption and possibly lost business.
“There’s more opportunity for good stuff to happen, but also bad things can happen as well,” said Meierkort.
However, many executives and shareholders put a lot of pressure on managers to make those changes as quickly as possible. That’s because the stakes are often so high and because as many as half of all mergers end up not increasing shareholder value in the long term. Tinkering with the supplier base is often high on the list, especially after the consulting company Accenture estimated a few years back that “supply chain synergies may constitute 30% to 50% of merger-related increases in shareholder value.”
Add to this a recent focus of some industries to reshore or onshore suppliers. Acquisitions can affect this process, either by accelerating it or jettisoning the idea, depending on whose voice prevails. Or, they can use the merger as incentive to look for entirely new suppliers. That’s often the case with lower cost products like garments, where sourcing is so fluid.
On the other hand, a merger or acquisition may be fashioned expressly for geographic expansion. Take, for example, last April’s acquisition by the American private equity company Warburg Pincus of a majority stake in the British fashion retailer Reiss, valuing the company at about $300 million. In announcing the deal, Warburg Pincus stressed its intention to aggressively take the brand to North America, Asia and Australia.
Sherwin-Williams’ $11.3 billion bid to buy rival Valspar is far more expensive deal. Part of the rationale is the lack of market duplication outside the US, which will enable Sherwin-Williams to gain a much bigger foothold in many overseas markets, especially in Asia, without shifting its own resources. However, antitrust considerations in Washington have so far held up approval.
It’s sometimes not immediately apparent just what the impact will be. Take, for example, the $4.7 billion acquisition of pork producer Smithfield Foods in 2013 by China’s Shuanghui International Holdings Inc. At the time, there were howls of protest and dire warnings that Americans would lose jobs. Instead, Smithfield has added more than 1,000 jobs in the US. It has upped production and obtained virtually total dominance of American pork exports to China. According to Shuanghui, now called the WH Group in English, Smithfield accounted for a whopping 97.1% of American pork exports to China in 2015, the latest year available, while many other producers were shut out of the market completely.