How a data-fueled approach drives successful mergers

Across industries, the prospect of pursuing a merger is a means to unlock new avenues of growth, amplify a company’s competitive edge, and even enhance their overall business standing. These strategic pursuits are fueled with the motivation of expanding their go-to-market strategy and revenue prospects or achieving cost reductions through enhanced scale and efficiencies. 

Tangible value expectations are a direct input into the future operating model design. If expectations aren’t discussed and no value creation objectives are stated, companies will not only fail to capture value quickly but also run the risk of being boxed into operating model decisions that will inhibit future value potential. 

Failing to use the magnitude of change that a merger creates runs the risk of never fully transforming a company to its fullest potential.  

Take a bottoms-up—not top-down—approach 

The old approach of a top-down, benchmark-based synergy analysis used to assess and estimate potential cost saving or revenue enhancements against industry benchmarks is outdated. Estimates lack confidence, resulting in blind spots and leaving value unrealized or overlooked. 

Management teams have a difficult time buying into the process, creating friction among the team. These approaches also lack the granularity necessary to make synergy realization actionable for teams.   

Using comprehensive data analytics and the bottom-up approach solves these problems. The data unlocked using this merger valuation approach is invaluable and can be brought straight into the board room with decision-makers to provide real, practical, quantified recommendations grounded in inside-out analysis vs. outside-in benchmarks.

This more detailed approach allows for analysis of the existing state of each business to identify value that historically has been left on the table. Cost and revenue synergies uncovered through an inside-out analysis are typically more specific to the merging companies and their operational details. Taking these personalized synergies quantified during the process and tying them to a company’s P&L is vital for ensuring the potential benefits can be integrated into the overall financial strategy of the merged companies. By demonstrating how the implementation of these value initiatives improves EBITDA performance by more than the one-time cost, it’s hard for leadership not to execute on these synergies. 

What are the steps in valuing a merger?

To help inform where we may find the most opportunity, we begin by forming hypotheses based on available information and industry context, identify and request data to answer these hypotheses, and then baseline the data to analyze and compare buyer vs. Target. 

There are several methodologies that can be used to identify a baseline:

• EBITDA bridge: A methodology used to understand changes in a company’s earnings over time. It breaks down EBITDA into its component parts and analyzes the drivers of change. 
• Profit tree: This method is used to analyze differences in location level profitability for multi-unit operators to determine the drivers of differences between low- and high-performing locations. 
• Revenue bridge: This method is used to diagnose sales force effectiveness and changes in sales strategy over time through breaking revenue down at the customer level. 
• Price volume mix: This analysis is used to understand what’s driving revenue growth/decline between change in price, volume, and mix.

Driving meaningful value in integrations 

Integrations are an inflection point for prioritizing value creation opportunities—such as qualified operational and financial outcomes—and measuring integration success. Buyers should treat mergers as an opportunity to rethink the norms of a business and then design operating models to drive value accretion. Successful integration plans require establishing and communicating key value drivers. While these may evolve during both the pre- and post-close phases, many drivers will remain the same and can be used as guiding points during the integration process. By conducting the bottom-up analysis, companies will have identified what drives top- and bottom-line value and identified areas of improvement for both buyer and target operating models. 

It’s important, of course, to layer in qualitative discovery on top of quantified opportunities to confirm or reject the opportunity hypothesis. Combined, this information can help inform integration and help prioritize objectives, further building out a 30/60/90-day post-merger integration plan while building trust with the newly merged management team to demonstrate that synergies are real and pragmatic. It’s worth noting that investments should be gauged by ROI rather than the speed or cost to integrate. The ultimate goal is to design an operating model for a fully integrated company that delivers incremental value when compared to the prior model. 

By leveraging comprehensive data analytics complemented by qualitative assessment, management teams can develop real, investible synergy targets based on their own data and not based on just “market” benchmarks. This allows for the development of highly realistic and implementable actions because they’re based in the real world and rooted in the conditions in which the merging business actually operates (instead of the “benchmark basis” of a generic comparison case). This is already a massive moment of change for a company; why not push the envelope a bit more for the strongest possible outcome? 

While the methodology and approach to integration programs may stay the same, quantifying value creation levers can differ across industries. For manufacturers, there are a plethora of value levers that can be pulled, including: 

• Leveraging scale and purchasing power with suppliers to lower per-unit price on raw materials 
• Matching demand, supply, and capacity to determine proper operational footprint and opportunities for consolidation or additional investment to drive profitable growth 
• Identifying cross-sell opportunities through analysis of historical product performance 
• Reviewing spans, layers, and market coverage to identify opportunities for rationalization of direct and indirect labor functions 
• Rationalizing duplicative technology systems

Companies should focus on revenue synergies throughout the post-merger integration process to realize higher valuations. Focusing here helps leaders better support the baseline investment thesis and craft a thoughtful implementation approach. It’s important to accurately forecast merger-generated cross-sell, and having a meaningful plan to enact this is a valuable part of achieving growth targets. 

Bringing it all to life 

West Monroe recently supported a leading textile e-commerce distributor with identifying critical synergies and integration following their largest acquisition to date. The client sought help identifying high-priority synergies to target, with a goal of $5M in EBITDA achieved by EOY 2024 along with setting up and managing an integration office for the first six months of activities. 

After identifying the key synergy levers, our team worked together to create a data-driven approach to result in quantifiable estimates of both benefit and cost. We:  

• Partnered with client stakeholders to identify and track $10-13 million of synergy from both revenue acceleration and cost optimization in marketing, warehouse operations, and G&A 
• Analyzed future-state organization spans of control and functional headcount benchmarks from proprietary database (Intellio® Insights) to identify $2.3 million in people G&A synergies 
• Leveraged proprietary PMO software (Intellio® Deliver) to effectively manage over a thousand activities required to successfully integrate functions with a focus on achieving identified synergies, including assisting with consolidating the acquired company’s main warehouse 
• Partnered with client’s CIO to envision future-state IT org to enable a “house of brands” strategy, including needed customer facing e-commerce capabilities that can flex across brands 

To date, this data-fueled approach has helped the client unlock $8.9 million in annualized EBITDA synergy.  Additionally, throughout the integration engagement, West Monroe helped identify and deliver up to $4 million in annualized EBITDA synergy not identified during the initial planning phase to further bolster integration value.  

By aligning the integration strategy to value creation objectives, we were able to create lines of sight for all stakeholders and ensured focus among execution teams on activities that moved the needle.  

Conclusion 

When conducting synergy identifications and developing an integration process, it’s imperative to complete a data-driven analysis early. By grounding the analysis in transactional data, companies can see quantifiable insights and avoid obstacles in the program. By being data-forward, the management team can prioritize integration objectives based on ROI and clearly see the opportunities at hand to set the overall strategy and vision for integration success.  

Decision-makers at both companies should own value creation projects throughout the integration process. By empowering them to take ownership and make decisions with the greater value creation narrative in mind, they’re able to effectuate a positive change. Ensure that change management is appropriately prioritized in the integration system. It takes strategic alignment, a strong organizational foundation and leadership to ensure large-scale transformations are adopted and create value.