We had to come to a view on each. There were other suitors for the British target so time was short. Over the next three weeks we analyzed each of the issues.
The attractiveness of the industry
The team first developed a view on the outlook for margins and growth in the industry. While part of this required analyzing available financial data, the main challenge was to understand the dynamics within the market – who are the customers for the products and how do they select and buy products, how do the retailers interact with wholesalers, and wholesalers with manufacturers. We also determined whether the market is homogeneous or comprised of segments with different dynamics.
The team based its research on all available market journals and on interviews with a vast array of players in the market. This was complemented by interviews with McKinsey consultants who had completed engagements in the sector.
What is the position and potential of the British company, and of the foreign player?
Our conclusion was that the market would continue to grow slowly, but that there was an increasing trend of polarization whereby consumers were looking to pay either a low price for volume products or a premium price for higher specification products. As a result a number of manufacturers were finding themselves in a shrinking middle market where they lacked the scale to compete on price and the quality to compete on specification. This had major implications for the British target of our client.
The scale of the merger synergies
It quickly became apparent that the main synergies would be in reducing costs of procurement and manufacturing. Revenue synergies would not be as significant owing to the complimentarity of the products and markets.
To assess savings achievable by combining operations we enlisted the help of McKinsey experts in manufacturing and procurement. They visited the operations of each company and analyzed available management accounts. They helped us identify the types of savings available in each area and helped us to estimate the degree of cost reduction achievable. They also advised us on the key issues that would be faced in achieving these savings.
At the end of this analysis we advised our client that the savings that could be achieved were real and substantial.
