Steve Plaskitt, Partner at MHA Tait Walker gives his expertise to shareholders in the seeking of vertical integration as protection to inflation and supply shortages.
The current position in Ukraine is horrifying for those suffering and fleeing war and the knock-on effects will be seen for many years to come within Europe. The ripples and waves are already starting to be felt within the UK, creating inflation and uncertainty, on top of the existing inflationary pressures, which in turn is a massive force for change for Northeast businesses. For some businesses this change will be too much. Profits will be forced down this year – and some businesses will undoubtedly sink. But many will survive and continue to thrive if they can react and increase their own sales prices and maintain/grow volumes in the face of the supply inflation surges.
There are so many reasons why prices are rising:
– rising inflation on incoming supplies (ranging from steel, shipping containers to computer chips).
– rising energy costs.
– lack of labour supply for many skilled and unskilled positions which has led to greater competition for retention and recruitment of staff which in turn drives up staff costs and churn and creates further inflation.
– labour and supply shortages also force delays or reductions in output and so customers are willing to pay more to secure key supplies.
– rising fuel costs have created increased travel and shipping costs;
– interest rates are now rising; and
– all of the above feed higher prices as the cycle of inflation forces others to increase their prices throughout the supply chain.
Inflation and global uncertainty are creating the perception of a tsunami of further supply shortages and transport disruption, especially for goods coming from Asia or Eastern Europe. Where some scaremongers may talk of stagflation and create fear, the reality is that change is natural and part of evolution.
So how do businesses seek to find niches and adapt their business models?
Some will identify which customers can pay the most and seek to direct their limited energies to those areas to maximise profits, others will seek more efficient ways of working and some will look at vertical integration.
We have started to see evidence of some larger UK company owners start to address these problems by looking at their supply chain with a critical eye and seeing if they can vertically integrate – by acquiring a local key supplier they can take a greater share of those critical items in shortest supply, take back control of their core supplies and seek to make synergy savings to counteract inflation.
So, what six simple steps should you start to consider when you are looking at vertical integration:
– identify the most critical parts which could be at risk of continued disruption or inflation.
– review your supply chain and analyse the spend across those suppliers.
– perform a SWOT analysis of those suppliers. – assess their lead time, responsiveness, competitive buying positions, capacity for growth and quality.
– consider their management team, commercial approach, and key employees
– who and how they could fit with your culture; and
– identify your alternatives.
Having completed these steps, you should speak with your corporate finance adviser and approach the shareholders of a target company to see if they would be interested in discussions. It is important in those talks to understand what they value as shareholders and assess the fit between the two companies. Only then can you truly start to build a business plan, financial model and see how the two companies could fit together – identifying potential synergies, savings and any sales at risk of being lost. At that stage you can properly assess the valuation and proceed further with the acquisition process.
Finally, don’t forget that interest rates are also starting to rise and so the cost of financing any acquisition must be considered. Inflation will not go away quickly – yet businesses that adapt quickly and change give themselves more chances to succeed during this period of political and economic change.
