Deal synergies are often a critical component of post-deal value creation for many acquisitions. However, they are also challenging to assess, quantify, measure, and deliver.
Lacking the right approach to deliver synergies can result in the deal not living up to expectations.
While the approach can vary from industry to industry, here are some common principles I’ve used or come across when approaching deal synergies.
1. COST SYNERGIES ARE NEARLY ALWAYS MORE PREDICTABLE THAN REVENUE SYNERGIES AND SHOULD BE THE FIRST LOW-HANGING FRUIT TO GO AFTER
Cost takeouts (either at the acquirer or the target) are more easily measured and planned for, largely because they’re in the control of the GM / P&L lead and the functional teams.
Typically, easier ones to execute on typically are the cost of goods sold (improving procurement efficiency or standardizing suppliers to get better pricing leverage), IT (consolidating systems), and functional costs (consolidating overlapping functional or commercial teams).
When the deal is comparable in size to the acquiring business segment, experienced acquirers also use the M&A deal as the trigger to build a more effective target operating model – and achieve cost efficiencies across the entire business segment (not simply focusing on synergies at the target).
2. ACQUIRERS SOMETIMES FOCUS ON ONE OR TWO TYPES OF REVENUE SYNERGIES BUT THERE ARE MANY WAYS TO PARSE OUT OPPORTUNITIES.
With access to new products or services, the most common synergy that acquirers focus on is cross-selling the target’s products to the acquirer’s customers.
However, additional opportunities to consider are:
Selling acquirer’s products to target’s existing customers
Enter new geographies that the target is strong in
Pricing improvements e.g. bunding target’s and acquirer’s products to gain pricing leverage
Since revenue synergies are seen as more difficult to achieve, they are sometimes not given the same analytical rigor and are therefore discounted more than they should be.
But developing thoughtful yet conservative analysis of the potential revenue synergies helps to make them more real for the business.
3. TRACK AND ASSIGN ACCOUNTABILITY TO INCREASE THE ODDS OF DELIVERING SYNERGIES
One of the primary challenges I’ve seen in transactions that don’t deliver the planned synergies is that the assumptions leading up to the valuation and deal approval are not “locked down” and managed.
Ideally, soon before closing, the integration management office should
take ownership of the final deal model
ensure that the P&L owner signs off on the model assumptions
track the base case and synergy numbers vs. actuals
run a regular cadence of checkpoints (for at least as long as the synergies are modeled ) with the acquiring P&L owner, the target leadership (if they are staying), and the corporate development team
4. DON’T FORGET DIS-SYNERGIES AND INTEGRATION COSTS
Underestimating dis-synergies is one of the most common negative surprises causing value leakage.
Examples that should be at least acknowledged and discussed with the business unit include:
1) One-time and ongoing integration costs (commonly related to IT, HR and Finance systems)
2) Compensation normalization – where a larger acquirer typically has to increase the compensation of the target’s employees to be on par with the acquirer organization
3) Potential loss of customers if either acquirer or target’s locations / branches are closed (typically in areas of overlapping footprints)
4) Possibility of delayed synergy realization, since the organization may not be able to focus on multiple integration workstreams
The above list is not exhaustive but is meant to provide some initial ideas on delivering deal synergies.
Having a thoughtful plan to strategize, value, diligence, plan, track and deliver synergies, combined with an effective post-merger integration team’s leadership can help more M&A transactions live up to their potential.