Due diligence for cost synergy capture

Capturing cost synergies in M&A

As corporations and PE firms consider mergers and acquisitions that will combine operations, they generally rely on high-level, top-down assumptions to identify cost synergies that are built into M&A valuations. These same organizations are often surprised when assumed post-deal operational improvements aren’t as significant as planned or take longer than expected to realize.

Acquirers typically spend three to four weeks on financial accounting and commercial diligence that tests the real market opportunity and customers’ satisfactions and dissatisfactions with the target. Unfortunately, diligence teams often gloss over cost reductions that are perceived as easy to achieve. This oversight can have huge ramifications on the M&A valuation and management credibility if those cost synergies do not occur or are delayed. Prospective acquirers may be able to negate this issue by performing synergy-capture diligence—a vital piece of operational due diligence that can be done alongside typical financial and commercial diligence.

Capturing cost synergies with this bottom-up approach puts management’s skin in the game early, and can help identify where specific cost reductions may be achieved. Such diligence can help justify M&A valuations and drive early alignment around the new operating model for the combined businesses.

Download the report to learn how to capture cost synergies that may be missed with a traditional top-down approach.

Deloitte’s five-step diligence and plan process for M&A synergy

1. Create consistent cost and functional baselines. 
2. Segment and prioritize synergy opportunities. 
3. Quantify specific synergy opportunities and cost-to-achieve by functional area. 
4. Develop new financial model and explain variances from initial assumptions. 
5. Create a synergy-capture enterprise blueprint and integration road map.

Pre-deal M&A synergy assessment example: Regional utilities company

The following example illustrates how Deloitte’s synergy-capture diligence professionals have supported organizations in their efforts to determine realistic cost synergies, costs to achieve those synergies, early blueprints for end-state operating models, and tactical steps for effective translation of the M&A valuation strategy into execution during the integration process.

Business issue: Assess the client’s synergy estimates for its largest-ever potential acquisition.

Scope and approach

• Deloitte supported the executive team by performing due diligence to validate its synergy estimate and update the company’s final bid.
• The evaluation encompassed general and administrative (G&A) and support-function cost elements (for example, operations, finance, marketing, and HR) where a “bottom-up” analysis was conducted.
• We gathered financial data and conducted interviews with senior executives to provide estimates of net efficiency gains focused on reducing headcount redundancies (for example, two operators serving customers in the same region) consolidating span of control and reducing redundant senior management positions, and identifying new synergy opportunities not previously considered (for example, inclusion of corporate insurance and audit fees).
  

Value achieved

• Our client identified 50 percent more incremental synergies than its previous top-down synergy estimates indicated would be possible.