As the economic environment continues to show strength, mergers and acquisitions play a key role for companies looking to expand. According to the 2017 RSM manufacturing monitor survey, a survey of 660 middle market manufacturers, 37% of companies surveyed plan to acquire a company or division while only 13% are ready to sell. That kind of imbalance between supply and demand indicates that the competition for acquisitions will be high and naturally drive prices up. As a result, it is critical to fully understand and pursue the synergies, efficiencies that can be gained by consolidating business functions, available.
While we addressed the key steps for evaluating synergies in a previous blog, below we discuss six promising areas for realizing synergies:
- Eliminate redundant services: Executive level management, accounting, purchasing, HR, IT and other back office functions can often be consolidated and the number of employees and tools (such as software packages) reduced. While this is usually self-evident and one of the most classic examples of synergy, it also requires careful planning and change management to make sure that all information is maintained and employee morale remains high.
- Leverage buying power: For a strategic acquisition, it is likely that some of the same products or product categories will now be purchased in larger quantities. It is also likely that the acquirer or the target has more favorable pricing. Using the combined pricing benchmarks and vendor knowledge as well as the new purchasing power, can lead to significant and rapid EBITDA impact.
- Consolidate facilities: Overhead generally makes up a significant portion of a company’s costs. Any chance to absorb operations of one company – whether corporate offices, distribution or retail brick and mortar outlets is a savings opportunity.
- Expand sales: While synergies are generally thought of as cost savings, they can also be opportunities to increase revenue. One of the most direct ways of doing this is to utilize the existing sales structure of the target company to gain access to geographies, markets and channels (such as big box stores, e-commerce or other distribution networks) where the buyer was not previously selling.
- Utilize cross-selling and bundling strategies: Cross-selling takes advantage of the existing products or services of each entity to sell new products to existing customers, and bundling involves grouping products together in a way that encourages a customer to purchase more (often by providing a discount of some sort). Both strategies provide added convenience to a customer by offering a larger selection of products. Unlike most other synergies, cross-selling and bundling benefit from less overlap between the buyer and the target; the more new products there are to offer, the greater the opportunity for cross-selling and bundling.
- Leverage brand loyalty and recognition: If the buyer or target have a recognizable brand, it may be possible to repackage existing products under that brand and charge a premium. While this requires some packaging redesign costs, it has the potential for high returns if executed properly. In some cases, it may make sense to take the opposite approach and utilize a less well-known brand to create a diffusion line targeting higher volumes at lower margins.
The more competitive the acquisition environment becomes, the more important it is to not only identify potential synergies but to accurately estimate their potential savings when making an offer and following through on realizing them after close. To learn more about how RSM can assist you throughout the merger and acquisition process, contact RSM’s management consulting professionals at 800.274.3978 or email us.