Inorganic growth strategies do not just provide scope to expand market shares but also creates opportunities that generate savings from increased scale and coinciding operations. However, the ones with experience will agree that the real challenge often begins after the deal closes and focus shifts to driving the expected value from the acquisitions. The pre-merger phases are undoubtedly very critical for the success of the deal. But, what about the post-merger activities which leads to the actual goals? Most of the times inadequate attention to the post-merger activities fails the entire goal to integrate the businesses in order to develop cost synergies and generate value for shareholders.
Procurement as key lever that pulls synergy post M&A
The cost and revenue synergies from any M&A activities are always derived from multiple pockets. Companies do plan meticulously to achieve the savings from all departments such as operations, procurement, sales and marketing, general and administrative etc. However, among these procurement synergies are considered to be very crucial and the quickest to generate the best value proposition.
Given the amount of recent merger activity in the Pharma world, the question of how to attain enhanced procurement savings in early-on in the merger process has become more prominent. As per broker Canaccord Genuity, the global beverage giant Anheuser-Busch InBev had estimated more than $2bn in cost savings from the $107bn acquisition deal of SABMiller, around one-fifth of this total was expected from procurement function alone. Following are few more successful cases which showcase the large scale synergies through mergers.
It is very much pronounced that the procurement organization of the two merging companies can optimize the external spend collaboratively to reduce costs, increase productivity and maximize savings. However, the question is how to achieve this procurement synergy?
Post-Merger Activities to Achieve Synergy
Mergers and acquisitions are built on the opportunities each company possesses and leveraging the benefits together. To drive out economies of scale post-merger, companies need to look closely and analyze through post- merger integration team. Following merger closure, the combined companies that have deployed a Clean room Team may be better equipped than most to capture large cost reductions in a short time. Figure 1 depicts the necessary steps involved the post- merger integration process.
Figure 1: Steps to achieve synergy post-merger
Most of the successful M&A deals pursue synergies with rigor and speed. This needs in-depth analysis, planning, research, and all needful refinement in the program much before the closure of the deal. Again, it is very important to understand the strategic intention of the involved parties. Based on the operational aspects, organizational capability and structures, the implementation plan should be developed which will eventually enable the procurement to identify opportunities and achieve the savings. A clearly defined process along with key capabilities development is always essential to deliver the required savings.
But, how to generate these synergy from procurement in a post-merger scenario? There can be multiple ways to execute the post-merger activities. We have distilled these different tactics into four essential ways that enable companies to capture synergies.
Deriving synergy from Procurement – 4 steps
Figure 2 : Four Essential ways to capture synergy
1. Post-merger Action- 1: Leverage
In the first stage, companies need to leverage on the exiting set up of procurement. This can be initiated with spend analysis followed by price harmonization among the existing set of suppliers.
1a. Spend Analyses and Segmentation of Spend
Spend analysis is the antecedent to any successful planning. It actually helps in understanding the combined supply base and enables greater visibility across the enterprise into the amalgamated spend.
1b. Price Harmonization
Key opportunities include price and contract harmonization covering the cost, delivery terms, availability etc. If both the acquiring and target companies buy similar goods from a highly overlapping supplier base, the focus should be on consolidated spend for both companies and seek for any possible volume discount. In case the suppliers do not overlap, i.e. both companies sourcing from different suppliers, a competitive bidding or price negotiation can bring better deals. Any non-addressable spend or contracts that cannot be re-negotiated should be not be considered for the savings estimation.
Generally, raw materials spare parts, components, and packaging etc. can save between 3 to 12% of the addressable combined spend. Whereas indirect spend such as facility, construction, logistics, maintenance, repair and operations and utilities offer savings of 1 to 5%. Other indirect spends such as marketing, HR, IT, telecoms and facilities management, offer potential savings of between 5 to 10%, as spend can be more easily leveraged across both the companies.
2. Post-integration action- 2: Rationalize
Organizations with a well-managed contract management process are always well prepared to ensure contractual commitments are optimized. If not done earlier, M&A integration phase is the best time to reassure this.
2a. Re-Assessment and Harmonization of Contracts
In this stage, the existing contracts are consolidated and normalized, which allows the procurement organization to grasp the “low hanging fruit” in the short term. The post-merger integration (PMI) team needs to understand the core business requirements and desired functionality of the goods/services to be purchased. Based on these requirements and specification any potential synergies plan can be derived. For example, if it is discovered that both the companies have similar suppliers, however buying different goods or services, then the focus should be on harmonizing specifications. Whereas, the companies can plan for harmonizing contracts by comparing terms across its common /similar suppliers to find out best possible way to rationalize the contract.
Selecting the best terms is usually the quickest and easiest source for synergy. An early analysis helps in establishing the foundation from day one of the new organization’s operation. The company can go to market as a single entity to purchases the combined scale under a single contract. This increased volume can allow for greater negotiation leverage with suppliers, resulting in better pricing, or achievement of greater rebates or better tier-based pricing. However, it is equally important that the renewed contract terms should be chosen based on a holistic consideration including quality, service level, delivery time, lead time, and overall supplier performance etc. and not just based on cost/price. In many cases, Procurement can negotiate new contracts prior to finalization of the merger, so that cost savings begin on day one.
3. Post-integration action 3: Rationalize
Some of the expected synergies may not be realized without supply base re-alignments. This starts with the integration of the supply chain of both the companies and then leads to the rationalization of the supply base.
3a. Supply Base Integration and Supply Base Assessment
The key objective of the supply base integration process is to categorize suppliers to prioritize the deployment of limited integration resources during the initial months (approx.12-18 months). The primary objectives of this exercise are to:
• Identifying the strategic suppliers
• Maintain a win-win situation with Strategic Suppliers to achieve agreed goals
• Identify and Stabilize non-strategic suppliers
• Achieve integration-related savings, supplier consolidation
Organizations with a well-managed supply base comprising preferred suppliers with strong business relations are best positioned to achieve savings quickly.
3b. Supplier Base Rationalization and Re-alignment
One of the most critical exercises posts the closure of M;A is to rationalize the supplier base. For example, if both the companies buy similar goods or services from different suppliers, it is advisable to check for phasing out a few of these overlapping suppliers. In this phase, the company should look for supplier capability assessment of the existing suppliers and reevaluate them based on the synergy with the current set up. Firstly, the company should look for negotiation at a lower price with the current supplier or phase out the supplier and shift the volume to a supplier who can provide other added value.
However, if there is limited supplier overlap and limited overlap of goods or services, the procurement organization need to critically assess the sourced goods and services and check if any transformational changes are required either to rationalize the supplier base or standardize the sourced goods/services. Expected synergies in this approach are significantly higher because in such cases procurement will influence the future demand. In addition, this approach reduces the proliferation of suppliers and/or goods and thereby the business complexity.
These activities will consider a range of strategies, but the primary focus is usually on supplier rationalization and category integration. Ultimately, the procurement organization needs to harmonize commercial conditions, compare existing and new suppliers’ performance and utilize its market position.
Figure 3: Steps and timeline for supplier rationalization (Sample)
4. Post-integration action- 4: Integration
The final phase covers the more complex exercise. Based on category strategies and supply risk considerations an appropriate consolidation strategy can be decided for the supplier base.
4a. Supply Chain Alignment and Strategic Sourcing
Key sourcing levers to be applied for the categories in this phase would be harmonization of specifications or ‘make-v-buy’ analysis. The following could be a few of the exercises;
? Value engineering: Through this overly complex specification of goods/services (mostly used for direct categories) can be simplified. It could also involve SKU standardization: e.g., using functional industry standard specifications or designs, product differentiation/ customization, and rationalization of SKUs to ensure the most cost-effective specifications.
? Global Sourcing: It would involve exploring opportunities to combine and leverage low-cost-country sourcing, expansion of geographic coverage of supply base and explore the benefits from global supply/demand situations. It will also be a good exercise for developing new supplier and reduce supply risk for the company.
? Strategic Vendor Relationships: Identifying the strategic suppliers and taking collaborative approach for category sourcing, developing joint cost-saving initiatives e.g., share productivity gains, integrate logistics operations, exploring opportunity for vertical integration or building supplier capability to justify make-versus-buy options etc. are few of the examples.
Figure 4: Below figure summarizes the four essential steps for driving post- merger synergy;
Figure 5: Below figure summarizes the
Key Considerations for a smoother execution
? Procurement opportunities should be identified and addressed during the early spectrum of M&A activities. An advanced spend management capabilities improve the ability to forecast cost reduction opportunities accurately and capture synergies quickly
? In order to establish alignment, the key industry performance metrics need to be assessed. We need to look beyond cost savings to the impact of cash flow benefits from standardizing payment terms, reducing inventory, and increasing innovation, etc.
? Changes to procurement strategies can impact the entire organization that is why it is critical to understand what changes will be needed. Effectively engaging the appropriate stakeholders and change management resources will help with this process.
? Communication and higher management involvement are equally crucial in making any M&A deal success.
Post-merger procurement integration is challenging. For example, a new company emerged out of the merger of two US-based retailers recently realized $740 million in savings in cost through synergy, way more than what was original base estimated during the due diligence. At the same time merger of two American pet food companies which were one of the kinds of large-scale unions of brick-and-mortar and e-commerce found it very difficult to pass the litmus test and establish synergy within the estimated time. The success of the earlier case was only possible due to proper goal setting, meticulous planning, disciplined execution and regular tracking. Whereas the latter case is an example that demonstrates that patchy and incoherent integration that can take be tricky to achieve the expected synergy or achieve any synergy at all.
Procurement organization must grab the opportunity and put itself in a more strategic role within the organization during the post-merger integration. A clear and transparent sourcing strategy will always help it to ensure the optimum benefit from the supply side synergies from day one. Beroe is all about sourcing planning, execution, which makes us well-placed to help. With its diverse industry and category expertise, proprietary databases, and proven methodologies, Beroe helps its clients to derive the best possible strategies to identify and generate supply chain savings.