• Analysis of 150 transactions shows that overhead savings of 17% can be made
• Current economic climate is driving an increasing number of forced consolidations

Analysis by Deloitte, the business advisory firm, has highlighted the costs being saved by companies that have been through an acquisition or merger.  As the credit crunch bites harder and deeper, both public companies and those owned by private equity investors are becoming increasingly focussed on delivering cost reductions either through performance improvements or further mergers.

Jason Caulfield, corporate finance partner from the operational due diligence team at Deloitte, commented: “With deal activity taking a hit across both the private and public sectors, we are seeing a sharp increase in the number of forced consolidations taking place as a means to ensure survival.

“Our research into 150 transactions has shown that there are tangible cost savings that can be made by addressing duplicated overhead costs, such as IT and Finance departments, typically driven by the requirement to build an integrated and single platform for the combined business.

“Sectors with scalable platforms, such as financial services, can show significant overhead cost synergies of around 30%, with significant average savings in their core business of 9%, primarily from migrating to shared platforms and eliminating duplicated IT costs and headcount.”

”Management needs to develop its plan quickly and execute once and once only,” says Angus Knowles-Cutler, merger integration partner at Deloitte.  “Integration synergies must be prepared for in a proper and robust manner with a dedicated and highly visible programme.  Companies which are too eager to trim overheads commonly encounter difficulties such as staff retention and labour issues, disruption of operational performance and organisational confusion.  These companies quickly lose experience and then often need to rehire.  Equally, ill-planned IT integration programmes can lead to major back office disruption resulting in the need to bring in expensive consultants to deal with issues caused by a lack of thorough planning and testing.

“Cost-cutting should be done with the long-term health of the newly combined company in mind, rather than as a quick-fix: the latter invariably works out more costly in the end.”

Most tangible cost-savings or “synergies” in an acquisition or merger are achieved from the elimination of duplicated overhead costs.

Key facts:

• The average overhead cost synergy has been found to be around 17% of the combined overhead cost base of the acquirer and the target company, where the entities are of comparable size;
• The greatest overhead savings can be achieved by removing costs in the IT (average cost synergies of 30%) and Finance (25%) functions, primarily through the elimination of duplicate roles, harmonisation of IT platforms and elimination of duplicated projects.  Sales & Marketing and Research & Development tend to offer the least potential for overhead cost reduction;
• Asset intensive sectors, such as manufacturing or telecoms can also exhibit potentially high overhead synergies of over 15% with savings in their core business of around 5%.  These core synergies however are highly dependent on the release of any excess asset capacity in the combined company;
• At the other end of the scale, human capital intensive sectors, such as media and software, exhibit much lower overhead cost savings of around 10% due to their reliance on their creative talent and people.  Inevitably this also means that any synergies in their core business are typically low at less than 4% and even then are typically from areas such as procurement and discretionary spend, rather than risk disrupting their workforce;
• These synergies do not come for free however.  Up-front minimum investment is required, normally of £1-£1.50 of one-off implementation cost for every £1 of annualised synergy, while full achievement of the run rate savings typically takes three years to deliver.

Ends

Notes for editors

About the research:
Deloitte analysed 150 transactions over a five year period from 2004 to 2008.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP, which is among the country's leading professional services firms.

Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, whose member firms are legally separate and independent entities.  Please see www.deloitte.co.uk\about for a detailed description of the legal structure of DTT and its member firms.

The information contained in this press release is correct at the time of going to press.

For more information, please visit www.deloitte.co.uk.