Pharmaceutical Executive Europe - November/December 2007 - (Page 39) Pharmaceutical Executive Europe Nov/Dec 2007 M&A 39 price. But profit improvements should not be based merely on combining the profits of the merged companies. Hence, synergies become necessary. For synergy management problems to be avoided, potential synergies need to be assessed during the due diligence phase and should form the basis for a decision on the acquisition price. Though it cannot represent more than a high-level estimate, an accurate and selective definition (as much as is possible) of the synergy logic and a transparent calculation basis are vital. The logic needs to be determined for each business area and then applied to further integration measures. Synergy logic is based on a comparatively straightforward rationale which, unfortunately, does not simplify the process of quantifying the synergies. The actual synergies result from comparing the future development of both companies with and without integration measures. The question is how will the profit — or, rather, the cash flow — improve with the integration? An example: the parent company plans to develop Product X. In this case the synergy potential depends on the original plans of the new subsidiary. If the subsidiary also originally planned to develop the product, then their development costs represent potential savings. If neither planned to develop the product nor procure it via in-licensing, then synergies accrue by adopting and selling the product. In this case, the synergy does not result from the saved development costs but from the additional margin generated by the subsidiary from the product sale, as this margin would not have incurred without the merger (Figure 1). This consideration may appear to be of a theoretical nature, yet it is absolutely necessary to determine the actual value of the acquisition. Allocation of synergies: overcoming silo-thinking The example above illustrates another synergy management issue. Within the acquisition process, it is common that the functional areas report the expected synergies based on the due diligence results, which are then used to determine the maximum purchase price. However, the synergies do not necessarily follow the structure of the company. You may find arguments that justify attributing the synergies of the example above to R&D. Or you may justify the attribution to sales and marketing, especially if the product would not otherwise have been developed by the subsidiary. In this case, realising the synergies largely depends on the success of sales and marketing and supply chain management, which has to provide the Figure 1: Synergy logic with and without merger. Without merger Case 1: Synergies from saved developments costs After merger Parent Development Production Sales & marketing Development Production Sales & marketing Subsidiary Development Production Sales & marketing Development Production Sales & marketing • Both companies would have developed and marketed the product • Centralized development of the product • Both companies will sell the product Case 2: Synergies from saved developments costs Sales & marketing Sales & marketing Parent Development Production Development Production Subsidiary No development planned Sales & marketing • Both companies will sell the product Synergy by reduction of costs or additional revenues • Only one company would have developed the product Legend: Costs or revenues
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