Chemical Merger Synergies

From the information provided in chart, the candidate should be able to observe the following:

• Client is 4th biggest player, and the target is the 6th biggest, with 10% and 8% market share; merger would make our client the largest player with 18% share

• Both have operating margins of 6.8%, which is in the range, but on the lower end of competition

An exceptional candidate would also notice:

• The merged company will become the largest player. It’d have major advantages in buying power and efficiencies of scale

• The data suggested that operating profits are roughly correlated with size in this market

Minimal adequate answer:

• “Given the increased size of the merged company, I would expect cost savings. I would like to look at a detailed breakdown of each company’s costs to look for potential opportunities to save”. Candidate should mention at least a few buckets of cost (e.g., COGS, logistics and distribution, advertising, corporate overheads)

• “There may also be opportunities to increase revenue. I would like to look at the breakdown of each company’s revenue. Perhaps there is opportunity to leverage each other’s strength”

Additional and exceptional answer:

• The candidate offers 1-2 ideas of costs savings, e.g. use size to negotiate better procurement prices, eliminate redundancies in corporate functions / overheads / facilities; suggest benchmarking vs. competitors

• Offer ideas on potential revenue synergies from leveraging best practice, e.g., cross-sell to customers from both companies, up-sell more premium products to customers where applicable, pricing optimization to reduce leakage etc.

• Offer ideas on potential cash synergies, e.g., adopt best practice in cash management (AR, AP, Inventory), eliminate duplicate Capex spend (new plant / facilities)

The candidate should notice that the target company is experiencing a higher pricing leakage from discounts, rebates etc. If the target company can adopt best practice from the client and reduce the pricing leakage from 8% to 3%, that translates to a revenue uplift of $400M x (8% - 3%) = $20M in pricing synergy.

The candidate should notice that there is opportunity to save by harmonizing the procurement contract terms. On some categories the client is currently getting a better discount and on others the target is. Upon merger, the merged company should be able to secure the lower discount for the total combined spend in each category (“buy cheaper”).

Total saving from 3 categories is $5.35M, with breakdown below.

• Category 1: $150M x (4.5% - 2%) = $3.75M

• Category 2: $80M x (2.5%-1.5%) = $0.8M

• Category 3: $40M x (3% - 1%) = $0.8M

If these categories represent 20% of the combined company’s procurement, a quick extrapolation renders $5.35M / 20% = $26.75M saving potentially. 

A good answer should include:

• Combined company would be the market leader with 18% share and could likely improve operating margins to above 7%

• We identified opportunities of value creation from (1) pricing optimization which brings $20M upside, and (2) procurement contract harmonization which brings another $26.75M saving.

• These are just 2 synergy levers. For next steps, we should continue to explore other potential synergies, including (1) dig into potential revenue synergies from best practices, (2) explore other options to further reduce cost such as overhead etc., (3) look into cash levers as well.