Title

M&A procurement synergies

Section
Guide
Summary

Procurement plays a vital role in any merger or acquisition, offering savings and efficiencies made possible through synergies. The ability to establish procurement synergies – generating additional value by creating economies of scale and efficiencies – remains a major advantage in winning deals and is a key influence on M&A markets.

Corporate buyers can use targets to form the main part of their investment thesis and defend against charges of ‘empire building’, while financial buyers can use synergies to drive long-term value and deliver alpha.
 

  • Where Are the Greatest M&A Synergies Likely to Come From?

    Identifying where your M&A synergies are most likely to arise is essential for maximizing deal value. While the traditional “rules of thumb” approach—estimating savings as 1–2% of total spend—offers speed, it lacks precision and often overlooks synergy opportunities specific to the transaction. These high-level estimates are typically discounted in valuations to prevent overbidding.

    A more accurate methodology involves a tailored, industry-specific synergy model. This approach adjusts M&A synergy projections based on several variables: relative company size, cost of goods sold as a percentage of revenue, supplier base overlap, direct vs. indirect spend composition, contract rigidity, and unique product requirements. In general, the greater the disparity in size between the acquiring and target companies, the more room there is for synergies.

    Horizontal mergers often yield the most significant procurement synergies due to supplier overlap, yet these are frequently underestimated in pre-deal phases and difficult to capture post-close. Conversely, vertical integrations offer synergies embedded in upstream or downstream product alignment, though procurement savings may be smaller unless both entities use similar raw materials or inputs.

    Direct procurement synergies usually offer greater financial impact due to larger spend volumes. In contrast, indirect spend—while less critical to end products—presents quicker wins post-close because of easier implementation.

    However, potential M&A synergies can be constrained by contractual limitations, regulatory differences, or incompatible product specifications. For instance, where companies operate under different testing standards, local content rules, or sourcing grades, synergy realization becomes more complex and diluted.

    Understanding the nuances of M&A synergy capture, especially in procurement, is key to building a credible and compelling value creation thesis.

5 key sources of procurement synergies

Harmonizing contracts by comparing terms across common or similar suppliers and choosing the best ones is usually the quickest and easiest synergy source.

Actions

  • Compare contracts with common or similar suppliers
  • Look at price, quality, service level, delivery time, lead time and overall performance

Benefits

  • A high degree of precision when estimating potential savings
  • Contracts can be renegotiated from day one of the new organization’s operation resulting in quick wins

Immediate scale is created by two companies going to market as a single entity.

Actions

  • Consider the increased volume needs of the combined company

Benefits

  • Greater negotiation leverage with suppliers
  • Better pricing
  • Larger rebates
  • Better tier-based pricing

Effective scale requires a change in practices or processes to increase the similarity between businesses.

Actions

  • Harmonize products across multiple suppliers
  • Eliminate non-essential part differences
  • Take action as soon as possible

Benefits

  • Alignment of goods/services purchased, resulting in aligned specifications and potential supplier consolidation
  • Better pricing and increased rebates

Organizational efficiencies are usually characterized by headcount reduction, particularly when there is a high degree of supplier or product similarity and contracts.

Actions

  • Cherry-pick best practices from each business, such as price-quoting processes, contracting, standardizing terms and conditions or using specific tools or technologies
  • Quantify time spent on redundant activities

Benefits

  • Efficiency gains
  • Lower total workload
  • Headcount reduction

Supply chain enablement involves scrutinizing potential synergies in purchasing and handling, which can also enable savings.

Actions

  • Assess whether larger economic quantities can be ordered
  • Streamline inbound and outbound logistics
  • Optimize currency impacts, taxes and tariffs

Benefits

  • Increased supply chain flexibility
  • Opportunities for efficiency gains

As a procurement leader, you’re likely to have been given a synergy target that was scoped out before the final deal was signed.

Whether you’re handed an attainable target or an unrecognizable wish list of overestimations, everyone from financial backers to the board to those on the ground will be looking to the supply chain to start bringing in the money. This is in addition to you and your team delivering the usual set of operational services expected.

The primary procurement task is to start picking low-hanging fruit because the saving of that first million or two will build confidence and the momentum needed to tackle more complex projects.

Procurement’s role in the rationale for merging companies cannot be underestimated. The pressure to achieve and the spotlight under which you do it may be an uncomfortable place to be, but it brings with it huge opportunity – not least the chance to elevate the role of procurement within the business, which can also assist you in winning over the stakeholders whom you’ll be approaching next.

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