Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration

The economic and financial collapse of 2008 and 2009 due to the credit crisis in the U.S. with global ramifications impacted dramatically the landscape for mergers and acquisitions (M&As). It is anticipated that, if there is a new merger wave, then a larger percentage of M&A deals will be more strategic than those in the wave that ended prior to this crisis, with special attention given to the increasingly risk-averse environment. In addition, it is expected that firms will seek to take advantage of existing strengths, be they in a particular region or in terms of distribution networks. This paper provides a methodological framework to enable decision-makers involved in M&As to quantify the potential gains through supply chain network integration in terms of risk reduction and cost synergy. In particular, we develop new pre-merger and post-merger network models that capture the economic activities of firms who seek to determine their expected total cost and risk-minimizing product flows subject to demand satisfaction. We utilize a mean2 variance approach to capture the risk associated with cost uncertainty. In addition, we propose three new synergy measures: the expected total cost synergy, the relative risk reduction synergy, and the absolute risk reduction synergy for the assessment of the potential strategic advantages. We illustrate the analytical framework with two sets of numerical examples which yield interesting managerial implications. The first set of examples demonstrates how the uncertainty surrounding the costs influences both the cost synergy and the risk reduction achievable through M&As. The second set of examples shows that decision-makers with distinct concerns should focus on specific synergy measures.