Post-Merger Price Integration

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1 Simon-Kucher & Partners Insights Post-Merger Price Integration "If the NewCo hasn t gained any pricing power by the end of the integration process, then the project can be considered as a failure." CEO of a Fortune 500 company

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3 The merger/acquisition has been announced In the coming weeks, will your vision for the NewCo become a reality? Will volume gains be on target? Will customers remain loyal? Can your sales force avoid internal turmoil during the integration? What strategies will prevent prices from being dragged down? How will you secure top-line growth? We understand the challenges. We ve been there to help companies just like yours answer the tough questions. Leveraging our extensive experience, Simon-Kucher has developed a new approach to the complex challenges of integration that ensure acquisitions result in lasting successes. For more than 25 years, Simon-Kucher & Partners has been building a reputation for helping companies optimize top-line growth. With a global network spanning 17 countries across Europe, Asian and the US, Simon-Kucher & Partners consulting teams have engaged with clients in all major industries and conducted more than 50 postmerger pricing integration projects over the past five years. Dr. Georg Tacke Dr. Klaus Hilleke Chief Executive Officers 1

4 Figure 1 Improvement equivalent to a 3% price increase Price 3,0% Volume A 10% volume increase has the same impact on EBIT than a 3% price increase 10,7% Variable Costs Fixed Costs -16,7% -4,2% A 4% decrease in variable costs or a 17% decrease in fixed costs has the same impact on EBIT than a 3% price increase -20% -10% 0% 10% 20% Assuming share of fixed costs of 20%, initial EBIT 10% 2

5 The need for increased tangible value Synergy is the magic word in every merger or acquisition. Cost synergies, found in economies of scale, purchasing, shared efforts in R&D, logistics efficiencies, overheads, etc., are usually easy to achieve. Revenue synergies, however, are harder, but their impact on the NewCo s global economic success, certainly in terms of opportunities or risks, can be much stronger. Behind every successful business integration, there are untapped margins. There is a lot more at stake here than the usual cost synergies. Figure 1 shows that fixed costs would have to be reduced by at least 16% to obtain the same margin impact of a 3% price increase a simple calculation. Between raising prices and reducing fixed costs, the trade-off is clear. The revenue lever, and the price lever in particular, are much more effective. 3

6 Case Study 1 Acquisition of a Direct Competitor Sector: Objectives: Project duration: Project impact: Retail - Europe Ensure the integration and global consistency of product portfolios. Remove duplicates in the product range and make sure that prices reflect the perceived value-to-customer. Screen the under-performing customer accounts and re-establish profitability. Measure cross-selling potential and define the right course of action. Identify price-driven vs. value-driven sales staff. 2 months +3.1 % points of ROS 4

7 Productive integration leads to pricing power Once a merger/acquisition is completed, most NewCos tend to become embroiled in internal issues such as scenarios for restructuring the new business. However, the real challenges for top-line growth lie elsewhere. If at the end of the integration process the number of customers has decreased massively, if the negotiated prices are lower, or if the product mix has shifted toward lower-value products, then the acquisition was unsuccessful. A successful integration must create tangible value on the revenue side. For this, net top-line growth is critical. There are several ways to achieve this: Integration of new product ranges Broadening the product portfolio Diversification of service offerings Better geographical coverage Improved cross- and up-selling Taking steps to increase customer loyalty Experience shows us that success (the creation of tangible value) hinges on one major factor: the reinforcement of pricing power. In other words, the company must be able to make customers accept higher prices or, at least, avoid decreases by holding to existing price levels. Unfortunately, very few companies manage to achieve real revenue synergies in the two years following the acquisition. It s a difficult task. As soon as the deal is publicly announced, customers even the most loyal ones will try to renegotiate contracts. Customers will try to drive prices down to the better of their two current contracts, cherry picking the best prices from each vendor. Customers and competitors alike will attempt to take advantage of the postmerger vacuum effect in which sales forces are worrying about their jobs and sales management of both companies can be tied up in endless integration meetings. 5

8 Figure 2 Turnover Distribution by Margin Level Annual sales 9m 8m 7m 6m 5m The profitability profiles are fundamentally different and offer huge potential for the purchaser 4m 3m 2m Target Company Buyer Company 1m 0m - 100m 0m 100m 200m 300m 400m 500m 600m 700m Source: Simon-Kucher project Margin per sales unit 6

9 Uncovering potentials for optimization Price and margin distributions in particular can shed light on opportunities as they represent the range of activities along the net price spectrum. Figure 2 illustrates a project Simon-Kucher recently conducted in the electronics industry with margins between the buyer and the target company that contrast strongly. The target company was underperforming significantly compared to the buyer and had a very different profile. While the procuring entity had a symmetrical and balanced profile, the target entity exhibited a very asymmetric profile driven by a minimum margin level. This is often the result of a cost-plus approach that doesn t factor in the diversity of their customers willingness to pay, thus leading to low price differentiation. In a nutshell, the target entity charges its customers the same price by applying a minimum margin, without trying to optimize value extraction. Here is what is important: If it is clear that the target entity is cost-driven and the purchasing entity is value-oriented, the potential for optimization is substantial. 7

10 Case Study 2 Acquisition of a Direct Competitor Sector: Objectives: Project duration: Project impact: Tour operator - Europe & US Design a pricing identity for each brand while ensuring a coherent price positioning across brands. Re-allocate destinations and hotels, etc. of both brands based on their characteristics and market coverage. Set up a price organization to steer the pricing performance of both brands while tapping into commercial synergies. 5 months +4.3 % points of ROS 8

11 Key factors in price integration Conducting more than 50 successful post-merger pricing integration projects over the past five years in various sectors across Europe and the US, Simon- Kucher has identified the following key factors for a successful post-merger price integration: Customers Minimize the risk of business erosion From the very beginning it is crucial to keep the risk of customer losses under control by: Employing methods to avoid any downward migration of prices Identifying problematic price differences Giving priority to both high-value and loyal customers Acquiring and deploying effective monitoring tools Products Pick the best out of both offers Product offers must be pooled and consistently positioned. It would be a major mistake to simply set both portfolios side by side and maintain prices. Rather, it is more effective to: Conduct a thorough analysis of the target positioning for each segment Understand customers willingness to pay Ensure consistency between price and performance levels Introduce common price level KPIs Process Drive the sales force differently The integration period provides a unique opportunity to create positive competition among the sales teams. Additionally, innovative methods can be used to motivate and lead newly formed sales teams. The ultimate goal is to strengthen the NewCo s pricing power by: Identifying the best performing sales reps and securing their loyalty Introducing new Peer Pricing TM methods to boost internal competition and spread best practices Introducing price defense as a sales force target Tracking changes with relevant KPIs Align sales goals/targets 9

12 Figure 3 Modular TOP-LINE Program Pricing Power Discovery Module 1: Target Synergy Module 2: Target + Buyer Price & Margin Mapping STAR TM PriceStrat TM Deal Post Mortem Peer Pricing TM Gains between 3 and 5 % points of ROS Simon-Kucher-developed tools for analysis 10

13 Figure 3 illustrates Simon-Kucher's unique and pragmatic approach for improving top-line growth and a proprietary suite of tools used for tackling post-merger challenges within a structured six- to eight-week program. The key deliverables are achieved in two phases: Pricing Power Discovery Module 1 identifies shortterm measures (quick wins) aimed at managing the commercial risks. The measures also include a first round of price adjustments. Synergy Module 2 identifies key improvement areas to work on, prioritized according to the required implementation effort and expected impact. Each module is based on methods developed by Simon-Kucher: Price & Margin Mapping Our proven audit helps the NewCo to conduct a 360 analysis of its pricing and margin practices. Based on an in-depth analysis of transactional data of the past 24 months, it precisely identifies deviations, the degree of pricing discipline, and best performances. Additionally, the audit can compare trends, track changes, or even conduct a detailed analysis of cross-sales and their potential for future development. At the end of the process, detailed action plans are established. Depending on the progress of the deal (availability of data), Simon-Kucher can work directly with the "integration office" or management teams. 11

14 Case Study 3 Acquisition of a Downstream Distributor Sector: Objectives: Project duration: Project impact: Mechanical Industry - Europe Avoid diluting the distributor s margin while integrating its sales team into the buyer s team. Develop a quotation tool that integrates the distributor s margin. The sales force of the acquired company should receive training about the added value of the new distribution branch and hence the opportunity to monitor its services. KPIs are implemented to monitor price defense. 6 weeks % points of ROS 12

15 STAR TM This quantitative method is used to analyze pricelists and their relative coherence. Based on a mathematical model, it checks that prices adequately reflect each product s features and value and develops the BIP (Best Internal Realized Price). In addition, this method allows rapid processing of several thousand references to obtain a valuable series of rational price adjustment propositions. PriceStrat TM Aimed at estimating and quantifying price-volume effects and competitive reactions, this method is based on structured workshops attended by sales, marketing and general management teams. A supporting tool allows Simon-Kucher to create revenue and margin simulations which are, in turn, used as the basis for further workshop discussions. Deal Post Mortem This method is used to conduct a structured and in-depth analysis on past won and lost deals in order to identify key success factors. The results dramatically expand the knowledge base of sales and management teams. PeerPricing TM Here is an innovative approach to sales management that reflects, in a very simple way, the best pricing practices for the entire sales organization. With every sales organization composed of a mix between Value sellers and Price sellers, this approach gives visibility to the best price levels. It has proven to be a highly efficient way to improve overall pricing performance. Designed to be simple, the approach is implemented through an easy-to-understand color code. 13

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17 Conclusion The integration of two companies is a unique opportunity to boost margins, yet very few companies manage to successfully take advantage of this opportunity. With our extensive experience, Simon-Kucher & Partners can deliver specific, proven tools and carefully developed methodologies to fulfill the expectations of a successful acquisition or merger. 15

18 Simon-Kucher & Partners Focus Over the past 25 years Simon-Kucher has helped hundreds of clients around the world address their strategic and marketing challenges. Regarded as the world s leading pricing advisor, Simon-Kucher publishes numerous articles and books on this topic every year. Our worldwide practice is built on evidence-based and practical strategies for profit improvement. We focus on Smart Profit Growth SM by helping clients increase their top line instead of cutting costs. Global Network Globalization is a core element of our goals and strategy. This means serving clients with associates and offices in all important markets. Today, we are an international and multilingual team of 500 specialists from diverse academic and professional backgrounds. We offer extensive knowledge and experience in a wide range of industries in both regional and multinational contexts. Our global network spans 22 offices in 17 countries across Europe, Asia and the US. In the past few years alone we have conducted projects in 60 countries. Consultants Our well-rounded approach to problem solving is supported by multi-disciplinary teams. Our consultants all specialize in specific industries or functions; we always find the best team to tackle your problem. All of our consultants contribute their unique and extensive experience to each project, be it a similar problem for a different product or a similar issue in another industry. Main Industries Automotive Banking & Financial Services Chemicals/Commodities Construction Consumer Products Electronics Energy & Utilities Industrial Goods & Services Insurance Internet M&A/Private Equity Machinery Media & Entertainment Medical Technologies Pharmaceuticals & Biotech Retail Semiconductors Software Telecommunications Transportation & Logistics Travel & Hospitality USA, Boston New York San Francisco Austria, Vienna Belgium, Brussels Denmark, Copenhagen France, Paris Germany, Bonn Cologne Frankfurt Munich Italy, Milan Luxembourg, Luxembourg Poland, Warsaw Spain, Madrid Switzerland, Zurich The Netherlands, Amsterdam United Kingdom, London Australia, Sydney China, Beijing Japan, Tokyo Singapore, Singapore To contact the office of your choice, please refer to :

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