Meeting the global supply chain challenge

By: Michael Joseph, Kurt Schmid, Ryan J. Stecz, Henning Buchholz

Managing global supply chain challenges in a divestiture

Supply chain disruptions have created new and unexpected hurdles as the global economy emerges from the COVID-19 pandemic. The availability of finished goods and raw materials has become less certain. Even when items can be acquired, they can take longer to arrive and may well cost more. Every company has been forced to reckon with these global supply chain challenges for their ongoing business activities.

At the same time, organizations must take supply chain disruptions into account when planning and executing transactions. For example, many companies have embraced divestitures as they respond to a market landscape changed by the pandemic. It’s important to get these deals right, and more than ever, the supply chain will be key among the issues that determine success.

It’s telling that Deloitte’s 2022 Global Divestiture Survey showed a big jump in the use of transitional service agreements (TSAs) for global supply chain challenges. Some 45% of respondents, a cohort that includes senior managers and executives from private and public companies, said they use TSAs for distribution/outbound supply chain issues, and 44% said they use them for purchasing/inbound supply chain. That compares to 18% and 34%, respectively, in our 2020 study. And it ranks supply chain above traditional areas such as IT systems, tax, and human resources in which a TSA might be used. (For more data from our divestiture survey, see the full report here.)

In our work with clients, given the current environment, we are seeing divestitures affected by supply chain concerns in two key areas: in the forecasting and budgeting for a new stand-alone business, and in the planning and execution of the post-deal transition.

Cost considerations

The supply chain issues affecting commerce in so many products and so many places make it more difficult to provide reliable cost estimates for a new stand-alone business that is being divested. These concerns are also making it harder to assess potential synergies and savings a divested business might achieve under new ownership.

With the pricing and availability of products changing faster than ever, sellers and buyers alike need to bring rigor to their examination of whether and where a business is going to be able to buy what it needs as they address the global supply chain challenge. Their analysis of how that affects the outlook for a divested business becomes more important.

Moreover, the unprecedented changes in global tax legislation are heavily impacting cost and overall pricing considerations. New legislation is trending toward imposing more taxes on supply chains, impacting cost and pricing. Additionally, there is a significant increase in compliance and documentation requirements, requiring companies to dedicate more resources and technology to manage tax processes effectively.

The ability to anticipate and mitigate potential supply chain disruptions and operations risks as part of a divestiture—whether through TSAs or other means—directly impacts business continuity and the attractiveness of a target. Indeed, a company that has its supply chain running well is going to be in strong position to find a seller, and one that is struggling with supplier issues or logistics issues may have to wait.

Execution hurdles

In a transaction, operational challenges often relate to the organizational structure. The usual considerations about who is moving over to a newly stand-alone operation have become particularly important as they relate to the systems and processes around suppliers and logistics. The right people need to be going with the divested business. Labor shortages are making it even more difficult than it might have been in the past to find people to fill any holes.

Companies need to look more carefully at how supply chain changes will be implemented and where supply chain optimization might help a divested business to hit its synergy targets. In the current environment of supply uncertainty, management teams need to be more savvy and dig deeper to address supply chain issues.

This is also an area where tax considerations are of the utmost importance to consider. As the requirements in this respect are typically highly localized, it is of particular essence to ensure these localization requirements are well considered as part of any execution strategy as this typically drives the ease of operations for a potential buyer.

Raised stakes

In a busy market for divestitures, global supply chain challenges have upped the ante, making it harder than ever to plan and execute a transaction. They have put a greater premium on the ability to anticipate how shifts in the global economy can affect a transaction, while at the same time raising the potential reward for those organizations that proactively examine and address such concerns.

Michael Joseph
Managing Director, M&A consulting services
mijoseph@deloitte.com
404 631 2059

Kurt Schmid
Managing Director, M&A consulting services
Kschmid@deloitte.com
612 397 4440

Ryan J. Stecz
Partner, M&A tax services
rstecz@deloitte.com
312 486 4087

Henning Buchholz
Senior Manager, M&A consulting services
hbuchholz@deloitte.com
832 943 9380