Consulting
Don’t sell that plant!
Guidelines for Assessing the Manufacturing
Function in an M&A Transaction
William Fink, Manager, Deloitte Consulting LLP and Timothy Vadney, Senior Manager,
Deloitte Consulting LLP
Executive Summary
The recent surge of M&A activity in high-tech manufacturing1
has mirrored an increase in outsourcing deals to electronic
manufacturing service (EMS) providers in low-cost regions
in Asia, Eastern Europe, and Latin America.2 Aggressive cost
reduction targets associated with M&A transactions can pressure
executives to shed asset-heavy operations in a hurry.
However, the quick fix may not be the right solution for the long
term. The short-term cost savings associated with outsourcing
manufacturing may be more than overshadowed by the long-
term strategic, organizational, and financial implications of
divesting assets. Instead, executives may be wise to give the
same level of due diligence to their decision to outsource as
they give to their decisions regarding the overall M&A deal
structure. When they consider an aggregate view of the costs of
outsourcing, a better answer may often be to maintain some or
all of the merged entities’ manufacturing assets.
Through real-world examples, this paper posits that the
“common sense” decision to divest manufacturing assets should
actually give much more careful consideration to the trade-offs
and choices that may create lasting value.
1. Riddell, Lindsay, “Mergers and Acquisitions Keep Tech Moving,” Silicon Valley / San Jose Business Journal, February 8, 2008.
2. “Wall Street on EMS vs. ODM market share and market segments,” Venture Outsource, http://www.ventureoutsource.com/contract-manufacturing/trends-observations/2008/wall-street-
on-ems-vs-odm-market-share-and-market-segments.
Manufacturing in the M&A Crosshairs
Manufacturing operations often become targets in M&A
transactions as the merging organizations strive to realize the
cost savings that prompted the deal in the first place. This may be
linked to the significant fixed and variable costs of production.
Direct material, labor, freight, and maintenance of property, plant,
and equipment are areas in which merging companies often aim
to reduce costs, because doing so is usually seen as an important
measure of M&A effectiveness.
Outsourcing manufacturing is one “out” for merging companies,
often cited as a vehicle to reduce costs, improve flexibility, and
reduce time-to-market for new products. The resulting asset
divestiture can also generate funds for other initiatives, such as
research and development and product innovation. Some companies
use outsourcing as part of an overall business transformation.
Companies involved in a merger may also find that they have too
many plants or plants in the wrong locations. A common measure
of the number of plants a company should manage is that the
number of plants should be in proportion to long-term demand
forecasts. Excess capacity can impact profitability, because a high
fixed-to-variable cost ratio hurts per-unit profit margins. Poor plant
location relative to customers or suppliers can also lead to increased
or unnecessary freight costs and production delays. As a result,
outsourcing the manufacturing function is often considered as part
of an evaluation of whether or not to reduce or relocate existing
production facilities.
However, outsourcing manufacturing as part of post-merger
integration isn’t consistently the better decision. Not only may it fail
to deliver cost savings, but a poorly designed outsourcing model
can also lead to organizational instability and loss of strategic
advantage. In some cases, it may even risk the overall viability of the
business.
To Outsource or Not? Three Examples.
To avoid these pitfalls, companies should consider evaluating the
manufacturing outsource/insource decision in detail. The following
three case studies illustrate effective industry practices and lessons
learned in making the outsource/insource decision, and show how
adopting these practices may help reduce risk and increase the
overall effectiveness of an M&A deal.

Case 1: Create a manufacturing outsourcing strategy to match Lessons Learned and Effective Practices
corporate business objectives.
This case illustrates what is missing from many M&A deals: a
A multibillion-dollar telecommunications infrastructure serious consideration of the manufacturing strategy prior to
manufacturer was acquired by a larger company that had making the outsource decision. Figure 1 outlines the critical
outsourced its manufacturing to an electronic manufacturing questions a manufacturing strategy should address as part of a
service (EMS) provider. Post-acquisition, the acquired company post-merger integration effort.
was asked to perform a detailed analysis of its current in-house
Chinese, North American, and European manufacturing and What type of manufacturing network is needed? The
supply chain costs and determine if an outsourcing-focused manufacturing network should be designed to serve the new
manufacturing strategy was a cost effective route for the newly company’s customers effectively while keeping costs in line with
integrated division. expectations. Companies with high-volume, low-mix products and
stable demand patterns stand the better chance of benefiting
The process began by analyzing bill-of-materials (BOM) cost from a centralized, low-cost, country-focused manufacturing
estimates from several EMS companies, long-term forecast unit network. Companies producing low-volume, high-mix goods with
demand expectations, air and sea freight rates, and labor rates in volatile demand patterns often benefit from a hybrid approach
China, Mexico, and several locations in Eastern Europe, the United where plants are located in both low-cost and higher-cost regions
States, Italy, and France. depending on product intellectual property content, degree of
labor deployed in the manufacturing process, customer locations,
and the ability of the company to pass along shipping costs to
its customers.
Figure 1: Questions Addressed by an M&A
Manufacturing Strategy How much capacity is required to meet market needs? Excess
capacity can hamper long-term profitability, but too little can
• Global
constrain growth. M&A deal-makers should determine capacity
What type
What typeof
ofmanufacturing
manufacturing needs based on expectations for market growth, productivity, and
• Regional
network do
network do we
we need?
need? customer demand. One strategy is to maintain in-house regional
• Domestic manufacturing capabilities while contracting with suppliers and
contract manufacturers for flexible capacity in times of surging
• Industry trends demand. Another strategy is to keep the technology-intensive
How much capacity
capacityisis element of the manufacturing value chain in-house, while
• Customer
required to meet
meet market
market demand outsourcing more labor-intensive activities such as assembly
needs?
needs? • Competitors and testing.

Should we make or buy manufacturing capacity? Where to locate

• Consolidate plants? The third and fourth considerations are intertwined. These
Should we
Should we make or buy
buy • Build decisions should be made based on total landed cost estimates,
manufacturing capacity?
capacity? • Outsource
risk considerations, and long-term demand patterns. When these
factors are taken into account, the answer is often to maintain
some or all of the merged entities’ manufacturing assets.
• Americas
• Europe Case 2: Create a valid business case prior to making the
Where to
to locate
locate plants?
plants? outsourcing decision.
• Asia

A multimillion-dollar telephone equipment company operating

Rather than simply going with the low-cost solution in China, the
most effective manufacturing strategy for this company turned out
to be a hybrid approach to managing production in each major
global region—North America, Asia, and Europe. Driving this
decision were local content requirements in Western Europe, the
inability of the company to pass along increased freight costs from
a centralized, global China-based manufacturing organization,
and supply chain risk concerns.
As a result of the analysis, the company also decided to maintain
in-house China manufacturing operations and implement a series
of global process-improvement and cost-reduction initiatives to
improve the profitability and flexibility of its internal operations.
European and North American manufacturing operations were
transitioned to contract manufacturers in those regions.
under an outsourced manufacturing model acquired a smaller
wireless equipment company that manufactured its own
products. Before the deal closed, executives made the decision to
outsource the acquired company’s products in order to maintain a
consistently outsourced operating model. This decision was made,
however, without careful analysis of the acquired company’s
product cost structure. Decision makers assumed that outsourcing
to Asia would be less expensive than manufacturing in North
America.
After the deal, the company worked with the preferred contract
manufacturer to develop a business case to measure the potential
short- and long-term savings of outsourcing manufacturing versus
in-house manufacturing. The analysis showed that while many
direct costs would be greatly reduced (e.g., wages, material),
other indirect costs would only be partially reduced (e.g., IT, legal,
facilities, insurance) under a fully outsourced operating model.
Some other costs (e.g., travel) would actually increase. The total
outsourced cost per unit was only marginally lower than the in-


 Figure 2: M&A Manufacturing Strategy Approach
Make
1 2 3 5
Confirm Determine Make
Corporate Future State vs. Buy
Strategy Capacity Needs Analyses
Buy
house cost per unit, which did not justify the large one-time cost
required to achieve the outsourced operating model.
Although the business case did not entirely justify the pre-deal
decision to outsource, the company chose to proceed for strategic
reasons. It was able to use the financial data from the analysis to
negotiate a better deal with the preferred contract manufacturer
and to improve the implementation of the outsourcing solution.
Lessons Learned and Effective Practices
While one could argue that this company’s decision was strategic
and not financially driven, an “outsource everything” model
should not come at increased expense to stakeholders. In this
case, the financial analysis revealed that the significant one-time
costs associated with outsourcing did not justify the marginal
ongoing savings and should have been evaluated prior to strategy
development.
An additional learning is that companies and their outsourcing
vendors should jointly develop an in-depth business case. Do not
underestimate the value of both teams going through this exercise
together. It facilitates a more efficient use of capital and can also
help leaders manage change more effectively in the acquired
company’s operations.
This case also demonstrates why a phased approach to decision
making is preferred—a phased approach provides a more
structured framework for using data to evaluate make vs. buy
decisions before the deal is done. Figure 2 outlines a phased
methodology to navigate the maze of M&A manufacturing
decisions.
1. Confirm Strategy. Define the requirements for corporate
or business unit level profitability and the associated
merger-driven synergies that support those goals. Existing
manufacturing capacities in both companies should then be
evaluated.
2. Determine Future State Capacity Needs. These capacity
requirements should be driven by evaluations of industry
trends, customer demand patterns, competitor actions, and
product development planning. Expectations regarding future
manufacturing technologies and their anticipated impact on
productivity should also be considered.
3. Analyze Make vs. Buy. Once profitability expectations, cost
reduction targets, and capacity requirements are defined, the
team should conduct a series of “make versus buy” analyses
to determine whether to consolidate plants, invest in new
4a
Consolidate or
Build Capacity
Follow
Through and
Monitor
4b
Outsource
Manufacturing
Operations
facilities, or outsource existing ones. The total aggregate cost
of creating a product and delivering it to the customer should
be viewed as the most important component of these analyses.
This exercise can help uncover hidden costs (particularly freight
and EMS margins) that can be a deciding factor when making
the decision to consolidate, expand, or outsource.
4. Execute. After the team reaches a conclusion on the make-
versus-buy decision, the execution phase begins. Activities
can include selecting plants for consolidation, determining
a greenfield site for a new facility, or choosing a contract
manufacturing company. Selection activities often range from
two to six months depending on the scale of the operations
involved. Executing the overall M&A manufacturing strategy
often takes between 12 and 24 months from concept to
completion.
5. Monitor. Many companies would benefit from the adoption of
new systems and processes to properly monitor the new state
of manufacturing. This may include a contract manufacturing
scorecard, system touch-points with a new logistics supplier,
and various process and information handoffs that were not
required in the previous manufacturing environment.
Case 3: Evaluate an M&A manufacturing outsourcing decision
based on an integrated process review.
A semiconductor test and measurement equipment corporation
decided to divest a major business unit. As part of this divestiture
process, the new company determined it would outsource
manufacturing and related activities.
The equipment corporation effectively managed the hurdles
highlighted in the first two cases provided herein, which included
the integration of the manufacturing strategy with the corporate
strategy as well as the development of a business case in a phased
approach. However, it encountered difficulties when attempting
to isolate the manufacturing assembly outsourcing from the
outsourcing of related processes.
The newly divested company no longer had the infrastructure to
support core activities related to global manufacturing, such as
prototyping, new product introductions, logistics management,
and trade compliance. The company evaluated each of these
processes, created an operating model to support them, and
determined the extent to which each of these could be outsourced
to an existing contract manufacturing company or whether they
should be retained in-house.

 Figure 3: Manufacturing Value Chain and Ownership Figure 4: Outsourcing Assessment Framework
High

Supply Chain • Captive • Retain

Planning & Sourcing
Assembly
• Outsource - Lift
and Shift
Support

Performance
Functions
Test

• Outsource - • Evolve
Repair Transformational (Re-engineering or
Quality Control Consolidate)

Owned in-house Owned by CM

Low Non-Core Core

The project was effective in creating a hybrid model that used
some of the manufacturing vendor’s capabilities while expanding
in-house capabilities in other production-related areas.
Lessons Learned and Effective Practices
This case illustrates that, in a post-merger integration
environment, a clear-cut strategy to outsource manufacturing and
the corresponding business case to support it may not be enough.
Having a new corporate structure dictates the need to evaluate
manufacturing as a component in a larger value chain (Figure 3).
The high-tech operations value chain begins with supply
chain planning and sourcing. The chain then extends through
manufacturing/assembly and quality control, and ends with
distribution and support for end customers.
Other processes with connections to the shop floor, such as
product development, product introductions, and service parts
management, must also be considered as part of a decision to
retain or divest manufacturing operations.
One of the effective practices used in determining which processes
should be included in a manufacturing outsourcing program is to
conduct an evaluation of the processes to determine whether they
are core to the company as well as to what degree they are a fit
for outsourcing.
Figure 4 illustrates how to conduct this evaluation process using
a data-driven decision framework. A company evaluating its
manufacturing value chain should look at each component
process and evaluate to what extent it is core to the business and
how it is performing versus corporate or industry benchmarks.
Manufacturing processes determined to be non-core or
underperforming are usually prime candidates for outsourcing.

Conclusion: M&A due diligence isn’t just for finance. This publication contains general information only and is based on the experiences and
research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering
business, financial, investment, or other professional advice or services. This publication
The three cases outlined illustrate both the rationale and the is not a substitute for such professional advice or services, nor should it be used as a basis
tools required for performing detailed due diligence as part of for any decision or action that may affect your business. Before making any decision or
manufacturing outsourcing decisions before, during, and after taking any action that may affect your business, you should consult a qualified professional
advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss
an M&A transaction. By developing a sound strategy, creating sustained by any person who relies on this publication.
a business case, and analyzing manufacturing subprocesses,
companies can be better equipped to make the right call for
insourcing or outsourcing. In the end, the “common sense” decision
to divest manufacturing assets as part of an M&A transaction is
actually a much more nuanced matter of trade-offs and choices that
must be carefully considered in order to achieve lasting value for
the stakeholders of each merging entity.

Contacts
William Fink, Manager
Deloitte Consulting LLP
415-783-4651
wifink@deloitte.com

Timothy Vadney, Senior Manager

Deloitte Consulting LLP
213-688-5424
tvadney@deloitte.com

References
As footnoted.


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