Comparative Analysis of Keys to Successful Revenue Synergy Programmes - Essay Example

Although growth has been the leading objective of post merger integration to ensure value addition yet a number of companies pay least attention towards attaining revenue synergies. The answer to this can be seen in the market behaviour; the markets show inclination to ignore revenue synergies; as an outcome, companies consider only to reduce cost. Revenue synergies are not easy to gain because of cross-selling functions, which can be problematic to deliver. That’s the reason behind companies’ preferences for achieving cost synergies at the loss of revenue synergies. It is quite interesting to know why companies do not make additional effort into recognising and providing revenue synergies although investors may give an increased level of confidence to achieve cost synergies and they show heightened awareness over revenue synergies, therefore, offer an increased value premium. Need is to provide increased insight to investors on revenue synergies so that the market could present a complete perspective of the strategic reasoning and better value as an outcome (Griffin & Sheikh, 2012). Revenue increase, its criticality in valuation and its provision after acquisition can be derived by dividing various sources of revenue synergy, aimed through the acquisition, such as: expansion into a new sector; expansion into a new areas; cross-selling products and services; Advantages from intangible rights and technologies; and growth in current market share. There is need of a closer insight at the difference between cost savings and revenue increase as add-ons to success, in the context of the degree of total value of the acquisition coming through revenue synergies and through cost synergies. It needs to be clear whether a pre-completion synergy appraisal requires a detailed bottom-up process or it should be a top-down high level method. Before finalisation of the in-advance synergy appraisal, it needs to be confirmed whether synergy aims are clear to all leading stakeholders (Griffin & Sheikh, 2012). Normally, there is no ambiguity relatively in the difference of drivers and expectations of M&A functions changing with time and as per the ongoing economic environment. It is interesting to observe the market behaviour after the recuperation from the recession worldwide on whether companies are currently acquiring for achieving revenue synergies or cost synergies (Griffin & Sheikh, 2012). When acquisition values correctly show possible synergies from both cost savings and revenue increase and when these are of central concern to the management after the acquisition, the results are more possible to fulfil or exceed aspirations (Griffin & Sheikh, 2012). The Kraft acquisition of Cadbury was projected to offer $1 Billion in Synergies, as declared by the Kraft Foods. The incremental revenue synergies of $1billion were excluded of $750 million to be achieved in cost synergies by 2013. These revenue synergies, according to the Kraft, would be derived from the business increase in developing regions from one/fourth of the total revenue to approximately touching one/third after the merger. A statement was made by Kraft Foods’ CFO Tim Mclevish prior to an analyst conference in New York, stating that “This combination of factors gives us great confidence that our company will generate organic revenue growth of 5% or more, margins in the mid- to high-teens and EPS growth of 9% to 11%” (Tse, 2010). The confidence of the Company management is getting reflected from the acquisition, as it expects to become a long-run high-bracket performer in the food industry world wide. Presently, the Company is earning more than 50% of its revenue from outside North America, from countries like Brazil, China, India and Mexico, where GDP and demand growth are the most firm (Tse, 2010). Kraft CEO, Irene Rosenfeld, also holds the same opinion from the “unique and complimentary combination” of Kraft and Cadbury, stating that, “together with our significant presence in high-growth developing markets, will deliver consistent growth in the top tier of our peer group”. The acquisition of Cadbury has enabled a jump in the shares of Kraft by 1.5%, reaching $31.52 per share. The same opinion has been expressed by S&P, as it has increased the 12-month price aim to $32 from $30 (Tse, 2010). According to S&P analyst, Tom Graves, “We see growth strategy from Kraft including an emphasis on revenue synergies from the recent Cadbury acquisition. Also, we look for Kraft's presence in snack food market to be a significant revenue growth driver, and we expect productivity gains to help gross margins”. This analysis of the Kraft’s acquisition provides a snapshot of the significance of revenue synergies created from the acquisitions otherwise and in the specific context of Kraft Foods (Tse, 2010). While discussing synergies, strategic category leadership provides the leverage of scale for international brands besides presenting local products in rewarding new markets. Merger and acquisitions become the tools to assist the CG&S companies to attain these goals. The “bolt-on” acquisitions offer strategic leverage at once via revenue and cost synergies. The example of Unilever is there when it acquired the hair-care brand Alberto Culver, helping Unilever’s hair care product line to quickly make use of its manufacturing and supply chain functions to achieve cost synergies. Unilever could also offer new kinds of hair care products and introduce matching products at new rates, thus, providing revenue synergies as well in the UK market (Thomas et al., 2012). Acquisitions such as of Cadbury by Kraft empower to create a robust portfolio of brands that complement the existing product lines, such as Reckitt Benckiser, the world’s third-biggest home care company and fifth-biggest OTC drug company, has been on the spree of adding home and personal care products to its portfolio through acquisitions. Revenue synergies can be created by getting rid of the non-core businesses, by pursuing a vision and policy on creating new businesses, aimed at brand building. For instance, Kraft is focussed to maintain the number one position in the market in each category of product line. That’s why it divested Post in 2007, as the brand was lagging behind others in maintaining the leading position, as was designed by the management. On the same line, Procter & Gamble streamlined its approach as a category leader in household products by selling its food businesses like JIF, Planters and the latest business Pringles. Revenue synergies can be attained by working on both sides of the equation; on the one side, investment should be made in strategic companies, while on the other side, it requires investing in after-merger integration leadership, strategy and formulation (Thomas et al., 2012). Post-merger revenue synergies can accrue through first-mover benefit in new markets besides creating assets in the form of properties when the land rates are not high enough to create affordability issue. Benefits can be leveraged from the pre-existing licensing transactions also. For instance, acquisition of Folgers by J.M. Smucker also earned Folgers brand’s licensing and distribution agreement with Dunkin’ Donuts, offering Smucker speedier reach to new levels of distribution and partnership links (Thomas et al., 2012). As post-merger integration is critical in availing revenue synergies, companies should be selective while making high bets. It helps in focussing on growth channels with dedicated efforts to ensure success. The latest trend, however, is that a relatively smaller company creates better value through a well structure acquisition strategy (Thomas et al., 2012). The latest acquisition by Diageo of United Spirits, as reported from the feedback of the conference cal with the Diageo’s management provides hints of the Company’s strategy. It is planning for the time being keeping its global premium spirits portfolio apart from the UNSP business. Nevertheless, Diageo is expecting revenue synergies after integrating the two businesses in the later term. Diageo is also considering going in for manufacturing of its global brands from UNSP’s production locations later for creating possible synergies for brands like VAT69 and Smirnoff (Jain & Sudhendranath, 2012). Post merger integration is very critical to stand guarantee of success of an acquisition. Before planning an acquisition, the synergy objectives need to be figured out in sufficient detail. Fields of synergy also need to be aimed for determining the quick realisation of those aims. The procedure of finalising synergies also needs to be planned by the line manager of the acquiring company and by taking into confidence the aimed company as well. They should also evaluate the functional risks pertaining to synergies for not having negative repercussions on the current business procedures (Gerds et al., 2012). It is very important to apply a methodological process to recognise and measure revenue synergies by developing a mechanism to lead the effort. Such a mechanism can help companies find value creation possibilities that crossover due diligence expectations by 30-150%. As per the developed mechanism, three layers of value creation include: Secure the core business: attempts to maintain pre-merger value and preserve the base business Seize collective synergies: existing value creation measures to attain economies of scale and increased efficiency Attempt choosing changing synergies: mostly neglected, often strength-building possibilities to create value by totally changing aimed actions, procedures or business divisions. Acquiring companies can make use of levers of value creation for different layers. Revenue is one of the levers to be used by acquiring companies for increasing growth by creating new strengths such as cross-fertilising product portfolios, regions, customer areas, and paths. Opportunities vary depending on value-addition layer for revenue synergies (Engert & Rosiello, 2010). Acquiring companies need to take a balanced approach by giving due consideration to revenue synergies and not depending wholly on cost synergies, as we see in the case studies of Diageo recent acquisition and Kraft handling of revenue synergies from the acquisition of Cadbury. References: Engert, O., & Rosiello, R., June 2010. Perspectives on merger integration: opening the aperture 1. McKinsey&Company. Available from: www.mckinsey.com [accessed 23 November 2012]. Gerds, J., Strottmann, F., & Jayaprakash, P., 2012. Post merger integration: hard data, hard truths. Deloitte Review. Available from: http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/deloitte-review/0cbc9e513cf26210VgnVCM100000ba42f00aRCRD.htm [accessed 23 November 2012]. Griffin, N., Sheikh, M., 2012. Post merger integration - securing value from future revenue enhancement. Frontiers in Finance. Available from: http://www.kpmg.com/global/en/issuesandinsights/articlespublications/frontiers-in-finance/pages/post-merger-integration.aspx [accessed 23 November 2012]. Jain, M., & Sudhendranath, A., 2012. Diageo deal announced. Nomura International. Available from: http://breport.myiris.com/NFASIPL/MCDCO_20121109.pdf [accessed 23 November 2012]. Thomas, L., Thomas, J. Herd., Dickman, Ken., Lanius, Joey., & Francis, N., 2012. Using mergers & acquisitions to achieve strategic objectives and high performance in the consumer goods and services industry. Accenture. Available from: http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Using-Mergers-And-Acquisitions-To-Achieve-Strategic-Objectives-And-High-Performance.pdf [accessed 23 November 2012]. Tse, A., 2010. Kraft: Cadbury acquisition to deliver $1 billion in synergies. The Street, 15 September. Available from: http://www.thestreet.com/story/10861887/2/kraft-cadbury-acquisition-to-deliver-1-billion-in-synergies.html [accessed 23 November 2012]. Read More