Deals that deliver the highest value to shareholders are those that not only achieve cost reduction but also amplify revenues. In the EY Buy & Integrate global pulse survey, the largest category of respondents — over 40% — cited entry into new markets or growing product capabilities as the key drivers for acquisitions.
But realizing revenue synergies can be difficult. The acquired company may have systems, supply chain structures, and processes that are quite different from the buyer’s. Below are some of the key activities the CFO and finance team can perform to accelerate the realization of revenue synergies:
The CFO is central to enabling a deal’s strategic goals, with insight into all the components, including finance processes, underlying data, and the cross-functional teams, like the sales force and supply chain. The CFO can also drive the alignment of operational execution with street expectations.
It is incumbent upon the CFO to plan the finance role in revenue synergy realization across the enterprise in collaboration with other functions prior to day one, rather than after other functions have developed plans that are not feasible from a finance standpoint. Waiting on the other functions to develop their plans could lead to the plans needing to be reworked, delaying synergy realization.
As we noted previously, the CFO is also in a unique position to drive the other functions to aim higher on synergies and see they are realized.
There are multiple kinds of customer synergies that companies can harvest:
Finance plays a number of roles in enabling the above synergies, from helping functions define synergy targets, to supporting budgets, to developing and adjusting finance processes. We would not be able to cover how finance supports all of these synergies in one article but will provide a few examples.
Finance can facilitate cross-selling — the most common revenue synergy strategy — by supporting receipt of combined purchase orders from customers, generating combined invoices, and applying commingled cash. Accomplishing such conceptually simple goals requires significant finance activity, such as monitoring combined customer credit limits, adjusting transfer pricing, and creating intercompany accounting and settlements.
In one example, EY professionals worked on a large retailer’s acquisition of a smaller rival. As part of the deal thesis, the acquirer wanted to sell many of its private-label products in the target’s stores as soon as possible because the sales season for such products was a month away. However, the target’s store systems could not easily accept shipments from the buyer’s warehouses, because of different methods of warehouse cost allocations and inventory accounting standards.
Finance led meetings with the commercial and supply chain teams to discuss details and developed a temporary manual workaround whereby stores received a full season’s volume of inventory. and accounting adjustments were done once.
Separately, the finance team often needs to work with human resources to create incentives for the sales forces of both companies to cross-sell, even before sales organizations and sales systems are integrated.
It is also critical to measure success not only in dollars but in operational terms. Finance should work with customer-facing functions to develop a clear baseline of sales indicators of stand-alone companies, including obtaining detailed customer data. Finance should then work with functions to develop metrics that confirm integration success — for example, the percentage of customers that bought products of both companies.
An example of the multiple levers finance can pull can be seen in the finance integration of a cloud-based service provider. This large acquisition focused on cross-selling and product-bundling synergies. The finance team got involved early and worked closely with business leaders and other functions to structure the tactical objectives of the strategy.
The implementation of the sales strategy required the ability to generate bundled customer billing, including pricing discounts, and the global presence of both companies required broad assessment of tax implications. The structure of the acquirer’s sales organization required finance to work with HR to establish new sales compensation structures, including new performance metrics. New internal reporting structures were developed to monitor overall success and manage strategy execution.
The supply chain is the key support structure for enabling revenue synergies. But aligning supply chains requires harmonizing multiple sales channels, different product lines or even SKUs of similar products, and serving multiple customer bases.
Waiting for the complete integration of these various parts can delay revenue synergies for years. But the finance team can help bridge some of these differences, allowing for quicker synergy realization.
The finance complexities involved in changing supply chain structures can be found in the merger between two chemical products companies. The companies sought to vertically integrate their supply chain channels to expand customer reach and product portfolio optimization. This involved leveraging the companies’ respective retail and distribution facilities. Differing inventory accounting methodologies between the companies presented significant challenges to properly track sales and profitability by producing location.
Finance realized a systematic approach was required and partnered with the IT and supply chain teams to develop a consolidated inventory costing system, enabling consistent accounting and reporting across the distribution channel.
The above examples are among the number of critical roles finance plays to enable the harvesting of revenue synergies. CFOs should deploy finance teams early in the deal process to collaborate with other functions on integration planning, developing new finance processes, adjusting metrics, and developing management reporting. Early synergy successes will drive excitement throughout the company and build momentum for long-term integration success.
Scott Rottmann, is principal, transaction advisory services, at Ernst & Young LLP. John Williams is an executive director of transaction advisory services. Andrei Arkhipov from the Ernst & Young LLP transaction advisory services practice contributed to this article.
The views reflected in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.