Mergers & Acquisitions (M & A) activity in the US has shown unstable growth, with the value of deals decreasing by 37% from 2021 to 2022 after a few years of high growth. Given the economic uncertainties in markets, many companies have transitioned to different frameworks for maximizing their value of mergers and acquisitions. More than ever, it is important to ensure an end-to-end understanding of cost synergies in order to close deals.
In most mergers, companies tend to focus on methods such as headcount reductions or operating-model changes to drive savings. While these strategies are highly effective, companies must also focus on mergers and acquisitions advisory to realize procurement-related savings. Such savings can drive tremendous value, with studies from McKinsey & Company showing that procurement-driven synergies, can drive up to 40% of a merger’s total cost savings potential.
Strategies To Identify Procurement Related Savings Opportunities During M&A
Include procurement experts in a clean team
By including procurement experts in a clean team, companies working on an M&A deal can identify and realize synergies at a much faster rate
Establish a common spend taxonomy
A common spend taxonomy enables companies to develop an accurate spend baseline, as well as size the spend consolidation opportunity
Launch Value-Capture Initiatives Early
Companies can identify and execute value-creation initiatives prior to deal closing, especially policy changes that bring the two companies closer
Include Procurement Experts in a Clean Team
In essence, a clean room provides companies working on an M&A deal with a safe environment to share and compare confidential data. Due to antitrust regulations, these rooms are typically staffed with a group of external, third-party consultants known as the “clean team.” The primary purpose of these third-party consultants is to conduct analysis on confidential data to better assess the deal’s prospects for success or failure.
By including procurement experts in a clean team, companies working on an M&A deal can identify and realize synergies at a much faster rate. Procurement experts are well versed with the latest trends in the third-party vendor base and suitability of various savings strategies. Such expertise and insights can be instrumental in identifying specific projects/initiatives, that can be implemented to drive value as soon as the merger is finalized. These mergers and acquisitions advisory professionals provide valuable guidance on procurement-related aspects, ensuring that cost-saving opportunities are fully explored.
Establish A Common Spend Taxonomy
An apples-to-apples spend comparison between the merger companies is critical in identifying and driving savings opportunities. This comparison is only possible if the spend taxonomy from the two legacy organizations are mapped to a common taxonomy.
- IT Services
- IT Software & Support
- Telecom Equipment & Services
- Hosting Services
- Value-Added Resellers
- IT Hardware
- Claims Litigation
- Claims Adjusting/Appraising
- Medical Bill Review
- Fraud Investigation Services Subrogation
- Travel & Incentives
- Office Equipment & Supplies
- Temporary Labor
- Building Leasing
- Equipment Maintenance & Repair
- Security Services
- Energy & Utilities
- Information Services
- Property Valuation
- Driver Record Reports
- Credit Reports
- Rates, Rules & Forms
While this can be a time-intensive endeavor, a common spend taxonomy enables companies to develop an accurate spend baseline, as well as size the spend consolidation opportunity. It is best that this activity happens as part of a core set of activities that occur in the clean room.
Launch Value-Capture Initiatives Before Day 1, if Possible
Typically, value-creation initiatives are only executed after Day 1 (of the newly merged entity). Some companies, however, are challenging this notion. By staffing a clean team with the appropriate expertise, companies can identify and execute value-creation initiatives prior to deal closing. These initiatives tend to be predominantly policy-focused, that intend to bring the two companies closer. In some cases, such as those with common suppliers, and tiered pricing in contracts, supplier negotiations may even be possible before the deal closes. However, in these instances, it is essential that companies preserve confidentiality, by implementing measures such as a three-way non-disclosure agreement.
Based on our past client engagement, some of the most successful strategies to drive procurement-related savings during a M&A process include
By comparing contracts and spend data, procurement can determine if the buy-side and sell-side are paying a different price for a similar product or service and execute initiatives to move to the more competitive price. To ensure such strategies drive maximum value, it is helpful to avoid looking at price alignment at the most detailed level, such as by product/service line items. Rather, procurement teams should consider similar products that aren’t quite identical and evaluate synergies on a product/service level. By taking these measures, price harmonization can deliver substantial bottom-line savings.
During a merger, procurement teams can leverage combined scale to drive higher discounts with suppliers. In executing this strategy, it is critical that procurement identifies the 3rd party spend areas with the maximum opportunity for such initiatives. This strategy is particularly effective for products/services that typically include tiered pricing in their contracts, such as IT, marketing and professional services.
Procurement can drive significant savings during a merger through policy alignment strategies such as adopting a normalized set of benefits which maximized value for the merged entity and imposing consistent service level agreements (SLAs) for similar services. Additionally, the merger environment is useful for driving the necessary change management associated with these efforts, as procurement professionals can use aggressive synergy targets, and pressure from business/functional leads as rationale when communicating these changes.
Mergers can provide a unique opportunity to reduce wasteful spend for the combined entity. Specifically, procurement can leverage the merger environment to impose spend limits on 3rd party services like temporary labor that typically go unchecked. Such limits help in disseminating a return-on-investment culture and a mindset of budget ownership amongst the newly formed organization. However, when imposing such thresholds, procurement should consider a nuanced view of the product/service area, the level of spend, savings potential and the practicality of implementation
Overall, procurement can provide significant value in identifying and delivering cost synergies during a merger of two companies. Through the strategies above, procurement can discover value creation opportunities well before a deal matriculates, so the newly combined entity can start to realize significant bottom-line benefits from Day 1.