Post merger pricing- contributing to the bottom line
Post merger pricing of products can contribute substantially to the value of all synergies realised by merger deals.   

A merger or acquisition provides an opportunity to refashion its operations as well as its working arrangements. Post merger synergies have an impact on the pricing of the company’s shares, leading to a change in the bottom line.

Post merger pricing requires a detailed analysis by financial experts as it involves more than a mere increase in prices across the board. Experts would have to evaluate various aspects such as:

• Do the prices of the merged company accurately reflect changes in benefits to its customers?

• Do its discount rules make sense after the merger?

• Do pre merger price structures make a good fit with changes in operations and distributions?

• What messages will a new price structure send to competitors?

• When should it be introduced?

Such issues would have to be addressed before quantifying the hidden value of post-merger prices.

Aligning price with new value created

The price charged by the company reflects the value offered to the customers, and the benefits they confer from the products and services consumed. Mergers lead to an increase in the quality of products and services offered, by way of better terms and conditions of ownership. Upon merger, the company can consider raising the price of its offerings only if the increased price justifies the added benefit delivered to the consumers.

Positive effect: This is illustrated by the following case.

Cross National Bank acquired many local and regional banks and integrated them into its regular operations. The bank was intending to provide added benefits to its customers. Among the several additional benefits, was the easy access to the company’s ATM network (which was one of the largest in the country). The bank upon merger realised that it could raise its price level to bring it in line with the added benefits offered to its customers. The increased prices led to an improvement in the overall profitability of the bank. Hence in this case, the bank was right in aligning its price level to the added value created by the merger.

A merged company can destroy value created by the merger, if it fails to align prices with enriched customer benefits. This is illustrated by the following case:

International Compressors acquired State Compressor, which sold similar products in the market. But State’s products were priced lower, and had a few loopholes in the form of fewer design patterns, weak filed service network and a less comprehensive warranty. International Compressors, in order to reduce the overall servicing and administrative costs, equipped its field personnel to support the sales of State Compressor, and also provide warranty coverage for its products. On merger, International Compressors went ahead with its strategy without increasing the price of State Compressor’s products.

This led to an increase in the sales of State Compressors, which led to enhanced value for the company. The new price-to-benefit ratio of State’s products eroded the market share of not only International Compressors but also of several other competitors. In order to enhance its share International reduced its price, leading to a decline in its overall value.

Price structure adjustment to uncover accumulated discounts

The price structure of a company consists of several components, which includes cost price, discounts, allowances and bonuses, the sum total of which is called “pocket price” for the seller. The percentage of these components in the price, varies from company to company. Upon merger, different pricing structures come together, factors such as discount structures must be compared and redefined to suit the combined price structure of the merged entity.

Using price structures to fuel post merger demand

By linking synergistic benefits to the pricing strategies of concerned companies, mutual benefits can be reaped.

How?

For instance consider a merger between two large tyre manufactures. The merged entity must take advantage of the acquired marketing and merchandising insights to formulate a new pricing strategy. This strategy will enable bulk purchasing at reduced prices, reducing the overall acquisition cost for the merged entity.

Mergers lead to better pricing controls for the combined entity…

Mergers can take place between same sized companies and different sized companies. The synergistic benefits derived by mergers of same size companies are greater due to the elimination of duplicate functions. Therefore, large economies of scale arise leading to lower cost. This leads to the formulation of new price strategies for the combined entity.

In a merger of unequals, there is less duplication to eliminate and hence little to gain due to large economies of scale. Such a merger provides a valuable chance to improve the combined company’s pricing practices, policies, and systems.

Merger activity leads to increased competition

When a merger occurs, the competitors closely study the pricing policies and strategies of the merger. To face increased competition, other companies revise their pricing and marketing strategies. This leads to an overall revision of various policies in the industry.

Conclusion

Distributors, customers, employees, and competitors expect a merger usher in change. But as time passes, and the new pricing, marketing and other strategic decisions fit into the merged entity, things once again become normal and these new policies now become the accepted ones.

Related reading:
“The hidden value in post merger pricing”, Marn.V.M, Swinford. D, The McKinsey Quarterly