Mitigating Risks in Mergers and Acquisitions Part III – Transformational Synergies
In my previous article reference is made to Transformational Synergies. These synergies may require more effort and time to produce financial results. Nevertheless, the results are often much greater than those that are attained by simply absorbing the acquisition into the buyer’s organization. The synergistic benefits of absorption type integrations are predicated on cost cutting, overhead elimination, and efficiencies of scale. This type of integration continues to be done, particularly where the Target Company is small, or when only a product or technology is acquired. Today, however, buyers are seeking to realize significant synergistic benefits by pursuing changes in their business model as part of the acquisition strategy objectives.
The following are some examples, from my personal experience, where the acquisition changed the acquirer’s business in a fundamental way:
After a major, multi-plant, paint and coatings manufacturer acquired a smaller competitor, two significant changes occurred that dramatically improved the company’s Return on Investment (ROI). Initially, the acquired company’s large size batches were transferred to other facilities where efficiency of batch size could be maximized at lower cost. All of the Buyer’s small batch sizes and specialty products were transferred from its other plants to the acquired plant due to the latter’s very flexible manufacturing capability. The result was a lowering of the cost of production for these products and improved profitability. Additionally, the buyer was able to then close three of its older plants resulting in significant cost savings. The second transformation was in the area of inventory logistics. Due to the many small batch sizes, a new just-in-time inventory and production control system was implemented. This reduced the inventory investment and warehouse space, resulting in greater financial benefit. The acquisition price was recovered in one year.
An electronic point of sale manufacturer acquired a competitor of the same size. The combined customers included many of the nation’s largest retailers. As a result, the acquirer achieved dominant market share in this market segment and greatly increased the demand for these new technologies. This market demand ultimately forced the prior dominant market leader into bankruptcy. The acquisition also brought new printer technology to the buyer, which was patented and provided a competitive market barrier for many years.
A specialty software company, through a series of product acquisitions, was able to expand their customer’s narrowly focused offerings by providing a full suite of marketing software. These acquisitions also allowed the buyer to enter new end-user market segments, both domestically and internationally. The buyer also acquired a company with similar product offerings, but utilizing a different technology. This acquisition provided core competencies outside of the base technology and allowed new market penetration, while denying this market segment to the competition.
Every acquisition will present problems and opportunities. The best way for success is to have a defined acquisition strategy, and exceptionally detailed due diligence. Assuring that the acquisition Target meets the defined requirements is most critical. Tracking the countless due diligence matters is imperative. Utilizing a comprehensive M&A software application assures that all of these matters are captured, documented and properly vetted to maximize the probability of success.
Reference: Deals That Transform Companies, Gregg Nahass Strategy+Business 5/26/14