February 2, 2017
As companies buying or selling look to maximize the value of a transaction, they will typically look at opportunities to accelerate volume growth, improve pricing or reduce cost. While this line item approach has – and will continue to be – a major source of deal value creation, there is one lever that has been underutilized yet could dramatically increase the value of a transaction: Improving mix.
Improving mix requires looking at the transaction not by individual financial line items, but by segment, and seeks to identify and capture opportunities to improve the mix of the products and services the business sells, the customers to whom they sell, and the geographic markets in which they operate. Improving mix is such a powerful lever because profitability and profitable growth opportunities are almost always highly concentrated within a subset of a company’s products, customers and geographies. Some segments within these categories can generate 10 to 100 times more profits than others. Understanding this profit concentration provides a roadmap of where to focus profitable growth and where to focus cost reduction, thus creating additional deal value above what you can get from managing individual financial line items.
Most deal pricing models and due diligence efforts are focused on identifying synergies by financial line item. When they do evaluate product, customer and geographic portfolios they do so only at a revenue or gross profit level, failing to see the total cost to serve these segments – and thus the synergies that can come from improving the mix. This line-item approach results in missed pricing on the sale side or missed synergy recapture on the buy side. Companies can enhance the pricing and the value of their acquisitions during due diligence by asking additional questions about segment profitability, and assessing the potential to grow the most profitable segments and improve margins of the least profitable segments. These questions should not only be asked on the buy side during due diligence to maximize the value creation of the transaction, but also by the sell side before a deal to ensure the maximum price is established.
Explore real-world examples of how deal value can be captured from enhancing mix, practical advice on the questions to ask, and steps you can take to uncover value in the recent article Why the Right Mix of Products, Customers, and Markets Is an Overlooked Profits Lever. To learn more about PwC’s Strategic Value Consulting services, please contact us or visit our website >