Procurement in M&As: the importance of identifying and implementing synergies

Actualizado: 14 sept 2020

Organisations have become larger and larger in the last decades, mostly thanks to external growth via mergers and acquisitions. This scenario has allowed procurement to take a key role in the strategic decisions of the company by identifying potential synergies coming out of M&As.

No matter whether the deal is a merge or and acquisition, the main objective will always be that the new group is worth it more than what the two parts were previously worth it in isolation. With this in mind, the main two points to focus are:

  1. Ensure we preserve the pre-deal value of each of the companies (don’t lose)

  2. Increase the value of the new organisation by identifying synergies (make a profit)

The most common ways of establishing the price of a company is by looking at the profit (EBITDA…) and applying a multiplier. To give an example (at a very high level), if for example, a company has a profit of 10, a reasonable price can be 50 (5 times the profit). There are many unsuccessful M&As, and that’s why the role of procurement is so key. Identifying ways were the 2 companies together will do better than each of them in isolation and implementing them may make the difference between getting the value of the deal or not. Let’s use the IT platform of a travel agency as an example.

Company A is a big travel agency that is trying to acquire company B which is a smaller operator. Company A has its own IT platform (Self Booking Tool from where the customers can book hotels, flights…). It has developed it over the years with internal resources while company B uses a third party. The cost of this 3rd party is not fixed. The supplier charges a 3% on each transaction done via the platform. Let’s have a look at the company's B P&L summary.

There are 2 phases where procurement support is required in M&As: The Pre-deal phase which includes the Due Diligence (ensuring the contracts with third parties are correct, the way the company sources is resealable and there will be no hidden costs) and opportunity identification (list the initiatives that bring savings from the group) and then the Post-Deal Phase which covers the implementation of the opportunities.

The most common ways of obtaining synergies in M&As are:

  • Consolidate at the supplier level: when we have various contracts with the same supplier, and we want to consolidate into one to benefit from volume.

  • Consolidate at a service level: when various suppliers are providing the same service/product and we want to consolidate with one of them to benefit from volume scale.

  • In-source: when one of the companies has a specific activity/function in-sourced and the other one uses a third party and there are chances to use the internal capabilities for the group at no additional cost or at a lower cost than the 3rd party.

  • Elimination of redundant work: when the service/product is purchased twice and there is only needed to do it once. A good example of this, are information services. If we already buy a specific market report, no matter how many new companies we acquire, if they operate in the same market and require the same report, we will only need one for all of them.

  • Improved asset utilization and productivity: this is similar to consolidating services but focused on CAPEX spend – factories, logistic platforms, offices…

It is worth to mention that the synergies will not only come from procurement/costs. There will also be synergies related to sales, product proposition or HR.

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