In a large proportion of mergers, a significant chunk of the synergy value goes to the seller in the form of a premium paid over the market value of the acquisition target. Even worse, in many cases the premium paid, coupled with post-transaction challenges capturing value can end up wiping out or eclipsing the value of the expected merger synergies. Obviously, this is out of line with the desired results and likely justification for the M&A activity. In this piece, we offer pragmatic approaches on how to realise your intended synergies from your merger or acquisition.
Pre-Transaction - Estimation & Planning
When evaluating possible synergies from various acquisition targets, many companies over-estimate the potential revenue synergies and cost synergies. There are a variety of reasons for this being the case including:
- Pre-merger advisors are disconnected from the post-merger integration
- Pre-deal teams often don’t seek adequate input from senior executives or key front-line managers, leading to poor estimation and lack of buy-in to synergy delivery
- Inadequate information about the acquisition target
- Bias in evaluating the positive multiplier of new ownership & management
There are some simple changes known to positively impact the above challenges:
- Soften expectations and see if the deal still makes sense
- Involve the right people in the pre-deal evaluation of possible synergies
- Align your executive leadership teams incentives to the delivery of synergies
- Look externally to industry benchmarks and assess the realism of synergy estimates
- Use third-party clean teams to validate key decision information
- Use third-party specialists to assist with the development of synergy estimates and the subsequent delivery
Putting aside the estimation challenges, the next area to address is the significant failure rates for the delivery of synergies in post-merger integration. Even when the up-front estimation correctly priced the potential synergy value, there is still a lot of ground to be covered before the value is captured and returned to shareholders. Failure of post-merger integration to deliver synergies continues to plague many acquirers long after the transaction is made.
Our consultants find that many client organisations encounter similar problems when it comes to delivering value through their post-merger integration activities. The good news is that many of these challenges can be solved with the application of practical interventions drawn from the patterns of successful acquisitions.
To capture as much of the potential value, focus on getting the following right:
- Ensure your target end state is clearly defined (TOM)
- Ensure program design adequately plans what business & technology changesmust be made to capture synergies and specifically how these will be executed
- Establish a small IMO reporting directly the executive for effective governance and decision making
- Identify possible dis-synergies, build mitigation strategies and monitor regularly
- Focus governance and decision making on capturing and sustaining value. Minimise the risk of operational drift away from the value you’ve created
- Identify and get ahead of talent risks as early as possible
- Ensure you have a strategy and plan to manage the cultural impact of the integration
- Link incentives to outcomes where appropriate but particularly with executive and key frontline management talent
Greater merger synergies can be achieved by looking beyond the mechanics of merging and focusing instead on how the value will be captured and banked.
Improve merger success and unlock your potential synergies as early as possible by speaking with Intuity Consulting.