Case Prompt:

You are hired to assist the CEO of a US Orthopedics company in the Post Merger Integration (PMI) process with a global European Orthopedic manufacturer. Your task is to identify opportunities for cost savings and provide advice on the integration process.

Exhibit:

The value chain of the companies consists of R&D, Sourcing, Manufacturing, Distribution, Sales, HR, Finance, and IT. Plant A currently manufactures products selling for $0.5b at $0.3b cost, but production can be transferred to Plant B for $0.2b cost. However, there will be a shutdown cost of $50 million and Plant B expansion cost of $200 million.

Background:

The US Orthopedics company, with revenues of $2 billion, is merging with a global European Orthopedic manufacturer with revenues of $1.5 billion. The companies operate in the same industry, manufacturing and marketing joints/shoulder/hip replacement parts.

Analysis:

To approach this case, I followed a standard structure by evaluating synergies in the value chain and highlighting potential risks and mitigation strategies. Three aspects were examined: value chains of both companies, synergies in value chains for cost savings and incremental revenues, and cultural integration issues.

Opportunities for cost savings:

R&D: 

• Patents: Combining Research Staff and cutting costs on Labs.

• Knowledge transfer on existing projects.

Sourcing: 

• Supplier consolidation: Higher buying power.

• Access to new supply sources.

• Knowledge of supplier previous contracts (transparency) with the other entity.

Manufacturing:

• Economies of scale.

• More optimum capacity utilization (if current plants were under-utilized).

• Knowledge exchange on production best practices.

Distribution: 

• Access to new distribution channels and new markets.

• Cross-Selling opportunities.

• Higher supplier power.

Consolidating plants: 

By shutting down Plant A and transferring production to Plant B, the company can increase profitability by $100 million per year, with an additional investment of $250 million ($200 million for Plant B expansion and $50 million for shutdown costs).

Other issues to consider if shutting down Plant A:

• Labor union issues.

• Any government regulations/labor laws.

• Cultural integration.

Other opportunities:

There are significant pricing advantages that can be gained through this merger. One of the firms charges more and has very strong brand equity among doctors. Revenue synergies could be discovered, although no numbers were given.

Overall, the key advice for the client is to assess the potential synergies in the value chains of both companies and prioritize cost-saving opportunities. The PMI process should also consider the cultural integration of both entities, and potential risks such as labor union issues and government regulations.