Apart from intangible benefits such as gaining access to global cultures, economies of scale, increase in purchase volume and greater market access are among the many merits of operational synergies post an acquisition. Here are some effective ways to leverage them
JEAN CHARLES THUARD
Synergies, particularly operating synergies are often the raison d’ etre of an acquisition. In acquisition parlance, synergy means two companies that come together through the M&A route, which are worth more than they would be worth individually. And, operating synergies enable firms to enhance both operating income and growth. Some good examples of operating synergies are scale economies; increased pricing power due to greater market share, combination of different functional strengths and, access to new markets.
Take the Legrand Group for instance. We have production facilities at Sinnar in Maharashtra, which manufactures wiring devices – a category in which we hold a market share of 20 per cent. Recently, we have also started manufacturing UPS devices in these facilities, thanks to our merger with Numeric. This reflects a strategy of same premise and no additional investment. That’s the beauty of scale economies. Additionally, we’ve implemented this strategy in our warehouses as well. We are in the process of clubbing all our warehouses progressively to help us tap scale economies, improve our economic performance, and offer better service to customers.
Operational synergies enable firms to enhance both operating income and growth. Some good examples of operating synergies are scale economies; increased pricing power due to greater market share, combination of different functional strengths and, access to new markets.
Operational synergies between two group companies also offer a merit. A good example is our collaboration with Indo-Asian, a company which sells protection products and circuit breakers (which, following the acquisition also manufactures wiring devices). The company has a strong network of distributors, established network of retailers and these customers could also be sold wiring devices. Additionally, this partnership also helps us have a greater presence in the wiring accessories market across segments. The nature of the partnership is such that, while Legrand will target the premium segment of the market, Indo-Asian will target the standard and economy range. And, the product and marketing communications can be tailored to reflect this. This is typically how we fulfil access to the chain.
Another important synergy that results from an acquisition is the increase in purchase volume, which enables us to strengthen our relationship with our suppliers, thus leading to a win-win evolution with them in terms of price, service and reliability of supply. What adds to this merit is keeping the company and the brand separate. On the market front, each company should keep its own identity, thus retaining its own personality, image, culture. Internally, companies should bring to each organisation support in terms of best practices, processes, communication and logistics. It contributes to the company’s objective of constantly increasing the value that each brand can bring to its customers.
Thirdly, synergies between entities can also be leveraged through greater market access. To explain this better, let me take you through a case study of Legrand and Numeric.
As a brand, we focus on selling our energy distribution, wiring devices, cable management home automation products and systems to the residential, hospitality and medical care sectors. Numeric on the other hand has a strong foothold in the BFSI sector. Owing to good internal communication between sales teams, we sell UPS to the verticals that Legrand targets. Similarly, we ride on Numeric’s distribution channels and brand name to sell Legrand’s offerings. In essence, the two companies leverage each other’s distribution channels and thus helping each other gain access to new markets and creating additional business synergies.
Lastly, aligning local strategies with the group’s global strategies creates additional value when managing operational synergies. For instance, Legrand globally grows on two pillars; organic growth and acquisition. Our strategy for the last 30 years has been to record 50 per cent growth through acquisitions and 50 per cent organically. This authorizes us to enter into new business activities, a good example being entering into UPS devices with the acquisition of Numeric. This was earlier done in Turkey with a company called Inform, and with another company in Brazil called SMS, In France with S2S and Italy with Meta system. This development strategy happens in every country, it has been the case in the US which has become the first country in terms of revenue for the Legrand group. An additional benefit to this route is when we visit a consultant or meet prospective high end customers we are able to offer them global solutions for their business. Overall, our objective is to offer a basket of varied complementary solutions covering the entire electrical and digital infrastructure of the building Our strategy is to progressively add as many products and solutions as possible to increase our range.
The intangible benefits
A company secures the benefit of cross cultural ideas from across the globe, across geographies and across entities. It gets a completely different experience which is interesting to share and to develop. For instance something that a company learnt in another country can be implemented in its India counterpart and vice-versa.
Five years back Legrand was the sole entity in India. Other companies which have come into the fold since then are Indo Asian, Numeric and Adlec. They have all brought their own set of expertise and learnings to the Group in India. Numeric is in the BFSI space and Indo Asian is in allied areas. It has increased our customer base, in terms of numbers as well as types. This has made it a melting pot of talent and experiences.
Following this comes the question of channelizing different cultures and expertise so as to take on board what is best for the global organisation. I would say one of the challenges when you do an acquisition is to engage new people into the new organisation, and make them feel a part of the organisation. The challenge is to make them feel that they are not acquired but create an environment which is conducive to them for not only giving their best but to surpass their previous achievements. It takes time and it is a challenge because obviously people are a bit scared and worried about the ‘change’, so we have to give them the confidence and I think this is the key – to give them time to get confident about the new entity. Also, it is an opportunity for the people because it offers them a wider platform to perform both inside and outside the country.
How you manage people will ultimately determine the success of the acquisition. People synergies will ultimately lead to realizing operation synergies.
Jean Charles Thuard is CEO of Legrand India. He is responsible for leading the development of the brand in India.