Many deals fail to meet their stated financial targets, often because they fail to capture potential synergies quickly and completely. Sometimes this is due to poor execution capability, a lack of integration resources, or missing implementation plans to guide the synergy teams. Other times, it is purely a lack of focus on the synergy realization efforts as associates’ day-to-day jobs get in the way of synergy capture initiatives. In many cases, companies wait too long to perform their analyses, develop plans and execute quickly after close. Timing is critical, because the value of a synergy opportunity erodes as each day passes, and it is impossible to make up for lost time.
There is often a reluctance to engage with the target before close to fully identify and plan how it will realize the full value of the opportunities. Many are understandably cautious and decide to wait, lest they set themselves up for Hart-Scott-Rodino violations. While those concerns are valid, a well-conceived and executed clean-room approach can set the stage for aggressive and immediate action post-close.
The clean-room approach has been accepted and proven for both the buyer and target to collaborate pre-close when there is a significant-yet-delicate opportunity necessary for deal success. Under the approach, an independent team develops detailed analyses and presents summary findings that enable senior executives to develop plans. Detailed, confidential information is protected until after close. Working within U.S. Securities and Exchange Commission guidelines, the process we have followed is straightforward:
1. Assemble a third-party advisory team to conduct the detailed analysis.
2. Set strict rules for how the data will be captured, stored, analyzed, summarized and presented.
3. Review all datarequests and all findings, which are approved by both companies’ legal representatives.
4. Provide all data requests to a steering committee with representatives from both companies.
5. Use the findings for pre-close planning activities, and make no decisions and take no action prior to close.
Here are two examples of where the clean-room approach was used with great success.
In the first case, a public steel pipe manufacturer was acquiring one of its competitors. The two companies had many overlapping customers and product lines, with different pricing positions in the marketplace. The companies also had large sales forces that often overlapped and called on the same set of customers. During an executive summit conducted immediately following the deal announcement, the steering committee determined that a comprehensive go-to-market plan would be needed to preserve the top line after close. Feedback from customers suggested they expected a streamlined customer interface immediately. This concern, clearly voiced by customers, stemmed from another recent acquisition in the industry that had not gone smoothly. This unfavorable experience had made customers nervous, understandably so, about further supplier consolidation and how that would could affect their supply.
Our firm assembled a team that analyzed a variety of customer and product data, including purchase history and trends, sales and account management processes, sales and sales support headcount by region, workload and transactional comparisons between the two companies, competitive intelligence, inventory levels and pricing by a variety of product lines, categories and specific products. The analysis included territory alignment and market coverage recommendations based on tenure of existing relationships, and a review of sales rep performance over time. Based on our detailed clean-room analysis, specific recommendations around the go-to-market strategy were developed. Upon closing, the recommendations were immediately shared with the client, together with detailed analytical support.
On day one, the company executed a unified interface with common invoicing, sales processes and integrated account teams; a logical, coherent pricing approach that prevented cannibalization for common product lines; and a rationalized product portfolio and customer base. The results included a 3 percent increase in revenue versus the plan, a 10 percent reduction in inventory levels and a 5 percent improvement in salesforce efficiency.
This clean-room approach enabled the company to very quickly make critical go-to-market decisions upon closing, and to inform customers and staff about the go-forward plan. This reduced and in many cases eliminated concerns and uncertainty, allowing associates to focus on the job at hand. Many customers complimented the professional and customer-centric approach, leading to share increases and increased future orders.
In another example, a public paper and packaging company was acquiring its major competitor and made promises to Wall Street that it would realize significant synergies to make the deal a financial success. The two companies manufactured similar products, and shared many of the same suppliers and raw materials. The senior teams of both companies also knew that it would be important to execute a comprehensive, thoughtful plan immediately after close to capture the synergies. Both companies shared their full list of purchased items to our team. The data were then organized into common product categories to determine where to focus the efforts in reducing purchase costs and improving supplier performance. Using the summarized analysis, the companies developed detailed strategic sourcing plans covering the high-value categories and key suppliers.
Prior to Day 1, the company provided detailed, targeted letters to the key suppliers laying out what they could expect once the deal closed. Immediately following close, teams met with suppliers and presented their recommendations and requests. The negotiations--for the top 15 categories representing more than 50 percent of the combined spend-- were completed within the first three months post-close. This resulted in synergies of $150 million, a 30 percent improvement over the initial estimate achieved several months earlier than expected. In addition, the effort united the supply chain teams of the two companies, creating a new, sustainable procurement process.
The clean room can be a powerful tool to accelerate synergy capture. Although it must be done with care, acquirers should not be afraid of the pre-close collaboration. By following a proven, simple approach like the clean-room concept, acquirers can improve their odds of successful post-close integration, synergy capture and ultimately overall deal success.
Jeff Alvis and Christophe Jeannin are directors at The Keystone Group, focusing on M&A, profit improvement and business strategy.