Title

Unlocking value in M&As: Estimating procurement synergies

Section
Insight
Summary

By Weihang Li

Procurement is a sizeable yet often untapped source of value in mergers and acquisitions, offering an opportunity for savings and efficiencies made possible by synergies. Are you maximising its value-generating potential with a robust procurement due diligence approach?

M&A activity is set to bounce back after fewer deals in recent years – bringing with it significant opportunities to leverage procurement synergies to maximise value through economies of scale and increased efficiency. For corporate buyers, procurement synergies strengthen the investment thesis and justify acquisitions against ‘empire building’. For private equity buyers, synergies in mergers and acquisitions can drive long-term value and deliver alpha.

However, the reality is that synergies are frequently miscalculated and poorly executed: as a result, 83%  of M&A deals fail. Procurement in particular is an area where synergies tend to be underestimated, causing companies to miss out on obtaining the most value and increase the risk of M&A failure. With a thorough procurement review, organisations can gain more accurate estimates of an M&A’s financial impact and the potential for future synergies through procurement strategies.

This article is the first of a three-part series on actionable insights into M&A procurement synergies. In this piece, we outline practices that can help corporate, M&A, and private equity leaders to estimate procurement synergies before and during a deal. 

The transformation program impacted every aspect of the client’s supply chain, driving commercial success along with broader organisational benefits, including:

1.    Contract harmonization

Harmonising contracts by comparing terms across common or similar suppliers and choosing the best ones is typically the quickest way to achieve synergies. Bear in mind ”terms” encompass more than just price; make sure to also review product quality, service levels, delivery times, lead times, and overall supplier performance. 

2.    Immediate scale

Combining the purchasing power of two companies to go to market as a single entity can create greater leverage in supplier negotiations, resulting in improved pricing, rebates, or tier-based discounts. This often requires no additional changes beyond consolidating contracts, making it a relatively straightforward opportunity.

3.    Effective scale

Achieving effective scale involves updating practices or processes to increase alignment between the merged businesses. This could mean harmonising products across multiple suppliers or eliminating non-essential part variations. This process is more complex and time-consuming than “contract harmonization” and “immediate scale”, so kicking this process off early can aid a smoother transition. All parties should bear in mind that compromise and common sense will be necessary. 

4.    Organisational efficiency

Less obvious sources of efficiency gains come from cherry-picking best practices from each business – such as price quoting processes, contracting, or using specific technologies or tools – could be exploited to foster value creation.

5.    Supply chain enablement

Build and strengthen relationships with global suppliers to increase supply chain flexibility and find savings opportunities in currency impacts, taxes, and tariffs.

 

Quantifying synergies: Best practices

A quick ‘rule of thumb’ may suggest a top-down savings figure of at least 2 to 5 % in M&A deals through procurement synergies, but unearthing the real value potential in procurement synergies requires a deep-dive into a number of key factors: business sizes, cost of goods sold relative to revenue, supplier overlap, direct and indirect spend, contractual barriers, and company-specific products. Analysing spend at the category level improves accuracy.
 

Synergies will be more prominent for M&As between firms with large size differences; smaller companies can gain more scale from merging with larger ones. Businesses such as technology or healthcare companies with higher labour or R&D spend are also likely to find greater opportunities for savings. When it comes to categories, direct materials typically offer greater savings potential because spend tends to be higher than indirect materials. 

There are also factors that can curb these savings, including company-specific product specifications, pre-existing contractual barriers that prevent renegotiation or supplier changes, and regulatory differences across regions. Accounting for these opportunities and limitations is key to setting realistic synergy expectations and understanding what areas and actions to prioritise.

The path to realising procurement synergies

Procurement savings are not to be sniffed at: they offer a significant opportunity to foster M&A synergies. Procurement assessments and strategies are instrumental in the due diligence process to enable a comprehensive evaluation of M&A opportunities.  Following this, poor procurement execution tends to be another stumbling block that causes organisations to fail to reap the full benefits of an M&A. 

As such, in the next article of our three-part series on M&A procurement synergies, we will take a look at the key steps to generate and maximise synergies post-merger.
 

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