Volume XXVI, Issue 64 |

Introduction

In today’s competitive deal environment, you cannot afford to dismiss cost synergies. Developing a robust sense of the potential savings achievable through economies of scale and the elimination of redundancies after a merger is essential to both a successful deal process and the realization of the total potential value following deal close.

Compared to revenue synergies, cost synergies are often more straightforward to identify, quantify, and track; and delivery is largely within the control of the organization. It’s not surprising, then, that companies are 10 times more likely to announce cost synergy targets than revenue synergy targets.1

In our experience, balancing top-down targets informed by the due diligence process and industry benchmarks, with a bottom-up investigative approach across a broad set of cost synergy categories, is a critical first step toward capturing savings opportunities.

In this edition of L.E.K. Consulting’s Executive Insights, we cover how to think about cost synergy potential and timing as well as the categories an organization can consider to ensure no stone is left unturned in the search for cost savings opportunities. 

Typical cost synergies by industry

Many factors impact the magnitude of cost synergies. Industry plays a significant role, as shown in the chart below (see Figure 1), with healthcare and TMT (technology, media and telecommunications) seeing larger anticipated savings than energy or industrials.The importance of major cost synergy categories will also be different by industry and the nature of a particular deal.

To achieve maximum value, organizations should understand the full range of opportunities and then narrow the focus to effectively prioritize post-merger synergy planning and execution. 

Sources of synergy

We typically evaluate the opportunity for synergies across the entire profit and loss statement of the newly combined organization. Approaching this on a function-by-function basis can be an effective way to develop synergy targets and initiatives, as the categories and typical timing to realize synergies can vary across the different parts of the new business (see Figure 2).

Evaluating synergy opportunities

We endorse a pragmatic approach to quickly drive toward estimates for synergy targets and initiatives. These estimates can be further refined by interrogating each of the functional areas listed above with respect to the number of typical synergy drivers, including:

  • Role or personnel redundancy and the potential net reduction in headcount across the newly combined entity
  • Organizational simplification through levers like reduction in management layers and overlapping teams or capabilities
  • Compensation and incentive package alignment for management, sales, etc.
  • Procurement scale benefits for both direct and indirect spending
  • Process improvement via streamlining, best practice sharing and other efficiency gains
  • Systems harmonization and rationalization
  • External spend reduction for third-party service providers
  • Renegotiated business or channel partner agreements to improve cost position or achieve other advantages (e.g., exclusivity)
  • Corporate cost removal or reduction
  • Footprint rationalization via rooftop and facility consolidation
  • Financial benefits via working capital optimization, capex optimization (or avoidance) and tax advantages 

Conclusion

Every acquisition carries the potential for cost savings or for resources that can be recaptured and/or redeployed to better serve the needs of the combined business. Using guideposts and frameworks as outlined here, we can help your team identify costs that can potentially be reduced or avoided, gain confidence that key opportunities are not being overlooked, and deploy a proven process that delivers results.

For more information, please contact us.

Endnote
1Based on public transactions with announced deal synergies between 2012 and 2022. 

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