Our site uses cookies

I agree Our site saves small pieces of text information, called “cookies” on your device. Find out more in our cookie policy. You can disable the usage of cookies by changing the settings of your browser. By continuing to browse the site you are agreeing to our use of cookies.

How to Estimate Procurement Synergy For M&A Deals

Procurement plays an essential role in any merger or acquisition, offering savings and efficiencies made possible through synergies. In the first of a three-part series of articles on procurement synergy, we outline the practice and challenges of estimating synergies before and during the deal. 
Why synergies fail to emerge

  • Time: In many cases there may not be enough time to prepare an estimate or investors may over-estimate using rules of thumb instead of rigorous analysis.
  • Data: Data may be incorrect, lack granularity or detail, or there may be limited access to the target organization’s management, limiting a valuable source of direct knowledge and clarification.
  • Bias: Synergy estimates might not be the result of impartial assessment but rather a (biased) amount needed to make the deal economics or hurdle rates work.
  • Methodology: The approach used to estimate synergies may be unstructured or inaccurate. Synergies may be ‘calculated’ simply as the gap between the purchase price and actual value.

M&A activity in many industries is at record highs – with the number of deals occurring globally growing steadily for the last four years, according to the Institute for Mergers, Acquisitions and Alliances’ (IMAA) latest statistics for 2016. M&As reached a peak in 2015, with companies announcing more than 44,000 transactions worldwide, with a total value of more than $3.5tn.

The ability to establish procurement synergies – generating additional value by creating economies of scale and efficiencies – remains a major advantage in winning deals, and this new, incremental value is a major influence on M&A markets. Corporate buyers can use targets to form the main component of the investment thesis and defend against charges of ‘empire building’, and financial buyers can use synergies to drive long-term value and deliver alpha.

Yet synergies are frequently overestimated and under-delivered. Analysis of past deals by Aswath Damodan in his study for Stern School of Business, The Value of Synergy, and Harvard Business Review in its 2011 report, The Big Idea: the New M&A Playbook, among others, has repeatedly shown that synergy estimates are frequently not observed, or fall short of an over-ambitious estimate.

The 70-90% failure rate of M&As outlined by HBR demonstrates that deals – let alone synergies – don’t always happen.

Sources of procurement synergy

Using a rapid, data-based, impartial and structured approach to estimating will ensure accurate and actionable synergies. Start by understanding the five discrete sources from which procurement synergies typically come:

  1.             Contract harmonization
  2.             Immediate scale
  3.             Effective scale
  4.             Organizational efficiency
  5.             Supply chain enablement.

Harmonizing contracts by comparing terms across common or similar suppliers and choosing the best terms is typically the quickest and easiest synergy source. Terms encompass not just price, but quality, service level, delivery time, lead time, and overall supplier performance. Direct comparison of contracts typically offers a high degree of precision when estimating potential savings. If this analysis is completed pre-close, renegotiation of contracts is possible on day one of the new organization’s operation.

Immediate scale is created from two companies going to market as a single entity and combining purchases in a single contract, often needing no additional changes. This increased volume can allow for greater negotiation leverage with suppliers, resulting in better pricing, or achievement of greater rebates or better tier-based pricing.

Less obvious sources of efficiency gains come from cherry-picking best practices from each business – for example, through price quoting processes, contracting, standardizing terms and conditions or using specific technologies or tools

Creating effective scale is harder than both immediate scale and contract harmonization, as it requires a change in practices or processes to increase the amount of similarity. This could mean product harmonization across multiple suppliers or elimination of non-essential part differences. The process should begin quickly, as dissimilar data or systems can make creating effective scale time-consuming, and be aware that both compromise and common sense will be necessary. 

The first and typically most obvious synergy to be found in organizational effectiveness is headcount reduction, particularly relevant when there is a high degree of supplier or product similarity and contracts. These can be consolidated to lower total workload and enable headcount reduction. Less obvious sources of efficiency gains come from cherry-picking best practices from each business – for example, through price quoting processes, contracting, standardizing terms and conditions or using specific technologies or tools.

Scrutinizing the possibility of synergies in purchasing and handling can also enable savings. For example, a merged company can order in larger economic quantities or streamline in-bound logistics.

Globalization can enable merging companies with close relationships with suppliers from different global regions to increase supply chain flexibility and create opportunities for savings by optimizing currency impacts, taxes and tariffs.


Struggling with procurement synergies following a merger or acquisition?

Download our guide for CPOs on maximizing procurement synergies following a merger or acquisition

Quantifying synergies

The ‘rules of thumb’ methodology, in which businesses typically use a top-down estimate of between 1 and 2% of all spend, saves a lot of time but sacrifices accuracy – in a conservative approach these estimates are discounted heavily in order to avoid overbidding.

A more nuanced way of predicting synergies involves establishing guidelines by industry and adjusting the estimate upwards or downwards, based on a number of factors: size, cost of goods sold relative to revenue, supplier overlap, direct and indirect spend, contractual barriers and company-specific products.


The larger the size difference between target and acquiring businesses, the greater the potential synergy – smaller will gain more scale from larger. In addition, companies in which purchased materials make up a larger portion of the cost structure will see greater synergies than businesses where labor or research and development spend is relatively large – such as technology or healthcare companies.

Horizontal mergers typically have significant overlap in suppliers, leading to higher savings. Vertical mergers capture margins embedded in products upstream or downstream, so may offer lower synergy potential. However, procurement synergies may occur in companies using similar raw materials or inputs.

Procurement synergy

Direct materials in particular can offer greater potential for savings than indirect materials, as the total amount of spend is typically higher. Indirect spend usually has little impact on final products and services and so any savings – while lower than direct procurement – have the advantage of being quicker to implement, post-close.

However, company-specific products or specifications, along with contractual barriers, can reduce synergy estimates. Contract barriers are anything that prevents contract renegotiation or supplier changes, decreasing addressable spend and therefore reducing synergy estimates. 

If the companies differ in grade, type, or size of what they buy, synergy estimates should also be reduced. Additionally, the synergy estimate should be lower if the companies must comply with different regulations, testing regimes, product approval, or local content restrictions.

Segmenting spend

Analyzing procurement at the level of category spend also improves accuracy. Any non-addressable spend – including internal spend, contracts that cannot be re-negotiated or spend where detailed information is unavailable – should be removed, before any savings can be estimated.


Efficio works with companies to actually execute the procurement improvements by:

  • Acting as an independent ‘facilitator’ between the two companies being merged
  • Having the arms and legs and expertise to overcome data issues and other ‘inertia’ that hinder execution
  • Speeding up the timeline to results (by adding more horsepower)
  • Using an independent and objective position to take the emotion out of organizational questions, and help devise the optimum organization structure across the two companies.

Direct procurement, including raw materials, components and packaging typically saves between 3 and 12% of addressable spend. Factory indirect spend, including construction, logistics, maintenance, repair and operations and utilities offers savings between 1 and 4%, reflecting the difficulty of consolidating this spend across sites and leveraging combined scale. Corporate indirects, including external marketing and HR spend, IT, telecoms and facilities management, offer potential savings of between 5 and 10%, as spend is more easily leveraged across the combined companies.

If estimated and executed properly, significant synergies are available in M&A situations. But more often than not, organizations fail to do this and the benefits are not captured.

Efficio works with some of the world’s leading private equity houses and corporations, supporting clients throughout all stages of the deal. Using its industry and category expertise, proprietary databases, and proven methodologies, Efficio helps our clients derive the best possible savings estimate and add colour to an often severely-limited data set, pre-deal.

External spend represents a significant M&A synergy opportunity. But all too often, synergies do not materialize post-deal and it’s usually simply due to poor procurement execution. Efficio is all about sourcing execution, which makes us well-placed to help.


The second of our three-part series will be published in the Autumn 2017 edition of The Source, where we’ll highlight the skills and approaches designed to help firms execute on the savings opportunities created. 

Subscribe to The Source

The Source is Efficio's global client magazine, which aims to inform, engage and inspire CPOs and other senior decision-makers involved in procurement and supply chain optimisation. Sign up for free via the link below.

Six pitfalls to avoid when developing your supply chain
Six pitfalls to avoid when developing your supply chain

Keeping your supply chain strategy fit for purpose is easier said than done. We identify some common failings.

M&A procurement synergies
M&A procurement synergies

Our ‘CPO guide on maximizing procurement synergies following a merger or acquisition,’ helps you identify your most valuable savings opportunities.

Moving up the value chain: transforming procurement at Elm
Case study
Moving up the value chain: transforming procurement at Elm

Moving from a transactional focus to a strategic one is a major challenge for many procurement teams. Efficio helped transform Elm’s procurement function into a strategic partner, while adding significant and rapid value to the business.

Faster, higher and more sustainable savings through digital transformation
Case study
Faster, higher and more sustainable savings through digital transformation

Many consulting businesses are discussing the benefits of new technologies, but few are adopting digital processes to grow their own business.