After an acquisition or merger, senior managers often find themselves under pressure to return benefits to shareholders—particularly if one company has paid a high premium for another. Synergies between companies and economies of scale are regarded as prime sources of value creation. Yet frequently the benefits fail to materialize: research indicates that up to 60 percent of mergers fail to create shareholder value within 10 years.
In many mergers and acquisitions, however, a potential goldmine of unexplored shareholder value exists in the form of purchasing and supply management (PSM). Our experience suggests that close attention to PSM can reduce by 10 to 15 percent the total cost of goods and services purchased by merged companies. An analysis of 50 recent high-value mergers and acquisitions shows that savings of this magnitude can recoup at least half of the merger premium, although the more scope there is for PSM improvements, the bigger the payback.1 If there is room for improvement in both companies, the premium can be more than offset, with a surplus of pure shareholder value.
So powerful is PSM that in a recent merger of two US utilities, approval from state and federal regulators was facilitated by projections...