Acquisitions are often pursued with the intent of creating synergies that boost efficiency and reduce expenses. The key is developing a strategy and a vision that enables you to realize these objectives, says Gerry Giudici, operating partner at Michigan Capital Advisors.
“When I think about synergies, I think about it in a managerial framework,” Giudici says. “Whether you're talking a source of synergy in the culture combination or the control of information and decision processes, I think you focus on the culture. Focus on reward and incentive systems. Focus on that control of information of the decision processes at various levels of the organization in order to be able to not only affect just a good combined company, but also going and achieving the synergies that you quantify and even synergies that you don't quantify.”
Giudici has held senior leadership roles for several privately held and private equity-sponsored companies, including portfolio companies for Wynnchurch Capital, The Carlyle Group and the Questor Fund. Making deals that help companies achieve synergies is one of his primary areas of expertise.
Smart Business Dealmakers spoke with Giudici about some key points to consider when looking to achieve synergies through M&A.
Decrease your vulnerabilities
Companies often underestimate the competitive conditions required to deliver synergies in an acquisition or merger, Giudici says.
“You've got to be able to limit competitors’ ability to challenge the new combined company’s input markets, supply chain and its processes or channels to market,” Giudici says. “In other words, decrease your vulnerabilities. You have to be able to engage competitors in ways not previously possible and that takes some pre-acquisition planning and a real understanding of the competitors. That often means opening new markets. It's that competitive intelligence and competitive analysis that is sometimes not as precise or as well thought through prior to an acquisition. Therefore it impacts your ability to deliver synergies. You haven't really gone through the game theory on what's the competitive response.”
Think about the customer
Supply chain savings are almost always worth pursuing by way of acquisition. Conversely, deals made to leverage customer relationships and achieve cross-selling synergies can be more difficult, Giudici says.
“Customer diligence is critical to make sure that as you approach that customer and look at more content with a customer or more programs with a customer, that the customer is not looking at it as way too much concentration from one supplier or one combined supplier,” he says. “You can't just say we're going to go and combine customers and have more with this customer and more with this particular customer. In theory, yes. But I think everything is dependent on the pre-acquisition customer diligence.”
Pricing power is always a concern for customers and if you're taking out a competitor, some customers may have concerns about the pricing power that a combined supplier may bring to the table through a deal.
“If a large portion of the combined suppliers’ business is an allocation from a particular customer, the customer may say that's way too much concentration of their business with one supplier,” Giudici says. “Some customers get uncomfortable with a high degree of concentration of their business allocated to one supplier.”
Create a platform
Another approach is to make deals that create a platform of companies in a particular industry or market segment. In order to shape a platform that can become a strong industrial franchise, you are looking at a couple of dynamics, Giudici says.
“You want a well-differentiated, solutions-based competition in the industry that you're dealing with,” he says. “You'd prefer limited fragmentation and high barriers to entry. That allows you to pull together and probably create that strong platform if your industry has limited fragmentation of suppliers and, of course, high barriers to entry of any of other suppliers that you don't see on the competitive horizon.”
You should also have customers who know the product or service that they're buying, Giudici says.
“That creates a high switching cost if they really understand the product and service benefits,” he says. “Look for businesses with strong market share and an ability to meet critical needs. If you look at those elements, particularly as a platform build or an add-on roll up play, those are ways you can actually create a strong industrial franchise.”
