How a manufacturer shaped high-value synergies in a complex deal

A multibillion-dollar deal is a big bet for any company. Unfortunately, most mergers fail to deliver the promised benefits. Numerous academic and private-sector studies estimate high percentages of acquisitions fail to live up to expectations.

It happens when integration teams act with caution when what is needed is bold action or they proceed as if the expected value will fall into place automatically once the deal is done. Instead, failure to implement a structured synergy realization program can result in missed opportunities, delayed value capture and integration fatigue, with the business settling for incremental gains rather than breakthrough results. In the constantly evolving industrial sector, the cost of getting it wrong can be substantial. When the goal is revenue or commercial synergies, as compared with cost synergies, the challenge is even greater.

A recent merger of two equipment manufacturers – involving the integration of two complex sales, manufacturing and supply chain organizations – offers helpful lessons in the challenges and approaches that can determine whether a deal is successful.

In the deal, a manufacturer acquired a supplier of parts for the type of industrial equipment it makes, betting it could increase revenue through cross-selling, better positioning with customers and aftermarket sales and service opportunities in a space where customers look for streamlined operations. The attraction lay in realizing synergies from complementary product technologies and overlapping portfolios and customer bases. Leaders estimated the merger would create over $100 million in synergies over the next five years, primarily driven by revenue synergies.

The team asked EY-Parthenon practice to help see the integration through sign-to-close and post-close stages, and the challenge was significant. Each company sells thousands of specialized products to numerous industrial clients, individually and as bespoke systems. Each company’s sales team had knowledge about the way the equipment was configured for different clients. Within that embedded knowledge was a gold mine of opportunities to create new value – by cross-selling based on the way products could be used together; by pricing equipment based on knowledge of the customer’s system configurations; and by generating new aftermarket business due to a more integrated product portfolio. But the opportunities wouldn’t come together on their own; to make it work, the integration team needed to mine a long list of accounts and products to find the potential synergy gems.

Given the complexity, the post-merger integration could have achieved an expected bare-minimum level of synergy success or even less.

Synergy capture can be challenging for industrial businesses because of their long investment, engineering and product life cycles, and revenue synergies can be especially tricky. Compared with cost synergies, they are more speculative as they depend on future market performance and customer behavior. Where cost savings, such as from eliminating duplicate functions, are generally easier to quantify and quicker to achieve, revenue synergies are more difficult to forecast, are dependent on the success of marketing and sales initiatives, and can take far longer to realize the full value.

Several typical risks were all present in the project:

• Customer attrition: If integration disrupts smooth service, customers could leave for competitors
• Organizational complexity: Cross-selling strategies require coordination across multiple teams and functions, including product development, sales, marketing and IT systems
• Cultural clashes: Different sales processes, go-to-market strategies or sales incentive structures can create internal friction

The synergies realization team set up a program to track synergies from the outset. Besides providing the needed record- and KPI-keeping function, the program signalled the team’s determination to be held accountable for outcomes. Other steps contributed to success:

• The acquirer assigned a capable commercial leader early in the process with post-merger integration experience and cross-functional leadership
• The team included leaders from research and development, engineering, supply chain, aftermarket and digital functions and business units
• The program was structured around multi-day in-person workshops focused on key product categories and solution types critical to the industrial sector customers
• The workshops brought together leaders and specialists from both organizations, including engineering, sales, product management, digital and finance, to ideate and prioritize opportunities by product, client type and region
• The team was determined to identify opportunities that not only drive incremental revenue but also position the business for long-term leadership in the solution ecosystem

The project identified four important synergy categories.

1. Cross-selling: The team aimed to leverage the target company’s equipment in customers’ multi-year solution structure to create new sales opportunities and increase customer engagement. Actions included developing playbooks for sales and engineering teams to maximize adoption and influence specifications, and mapping workflows and equipment specifications to customer projects.
2. Product development: To accelerate innovation, the project developed business cases for product development in core industrial equipment and digital monitoring, including advanced analytics and software-enabled services.
3. License and equipment: The team identified markets and service areas where they could designate the acquired company’s products as potentially mandatory or recommended equipment in customers’ plant designs, targeting numerous projects per year.
4. Digital and aftermarket: Leveraging asset performance management, connected devices and digital reliability solutions to expand aftermarket pull-through, increase service revenue and drive recurring value. Addressing customer pain points through process optimization with enhanced instrumentation and digital monitoring.

An example of a specific synergy that likely would not have occurred without this approach involved one of the target company’s specialized products. The target’s sales team brought forward their extensive knowledge of the way customers’ needs changed over the lifecycles of the equipment and plants, many embedded in customized system configurations with the acquirer’s technology. Their insights could be leveraged to create customized and dynamic pricing, with added value for both the company and its customers, as well as new sales opportunities for the acquirer’s equipment – an example of what could have been missed without close coordination between the acquired and target companies’ sales teams.