With acquirers paying an average premium of 40% over targets’ market value, delivering on promised synergies is critical to the success of most mergers. And because external spending so often represents the largest share of a company’s costs, the procurement function is typically the single largest source for potential synergies.
Most companies delay pursuing the promised savings until after the deal closes for a variety of reasons.
However, as several recent mergers have demonstrated, companies can devise creative solutions that allow them to take at least modest steps toward achieving procurement synergies before the deal closes.
Moreover, for large, complex acquisitions in which completion may take several months, the value created by identifying and initiating synergies before the closing can be significant.
Simple math suggests that accelerating first-year savings capture by three months would allow a company to report approximately 25% of total savings sooner, increasing the odds of satisfying investors.
In getting a head start on these synergies, companies can sooner test their assumptions in the market, while they may also benefit from initiating the pursuit of synergies in the relative calmness of the pre-closing period.
The authors next provide some creative “workarounds,” reminding that it is critical for a company’s leaders to seek input from the legal department on the right way to pursue synergies before closing. Also, companies will have their own context-specific concerns about competitive dynamics, the use of proprietary data, and the complexity of contracts.
Insights presented and discussed include (1) Focus first on demand management; (2) Look to tiered price structures; and (3) Consider a three-way non-disclosure agreement (NDA), among each merging entity and the supplier.
This last approach brings suppliers into the dialogue that already exists between the merging companies and their procurement clean team.
As a fallback, if there are no other viable alternatives, the authors also suggest companies can undertake the heavy lifting to prepare an RFP for each procurement category before the closing, but wait until Day 1 to pull the trigger.
In conclusion, given the ever-increasing expectations for procurement synergies, every dollar—and every day—saved makes a difference.
By thinking creatively about how to overcome the challenges, companies can expand the possibilities for accelerating value capture and reap significant rewards.
By, Aasheesh Mittal, Senior Expert in McKinsey’s Operations practice; Jeff Rudnicki, Partner in the Boston office of McKinsey & Company; and Steve Santulli, Knowledge Expert in McKinsey’s Transactions practice.
Content originally from Transaction Advisors
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