- May 11, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
How to succeed in achieving M&A Synergies
The myth that 70% of all transactions fail and that M&A gives poor returns corresponding to strategic acquisitions no longer exists. Synergy is a crucial element to value creation in M&A. In many deals, i have witnessed that there was too much leakage between the notion of acquiring a business, turning that acquisition into expectations, turning those expectations into budgets, and eventually turning those budgets into cash flows. Hence the acquirers need to plan to succeed in achieving M&A synergies so that they can deliver higher shareholder returns.
General Concerns in Synergies in M&A
The number one focus in synergies realization is on preserving the base business. Many managers’ time gets consumed by a massive deal, and that is one of the principal reasons why large significant transactions, on average, underperform. The other issue is how many people to include in due diligence and to what extent. Another glaring problem is the transition to integration planning and when one needs to include people. If individual executives do not get involved, they might not believe in the deal and the synergy opportunity, and that may provide a delay in courses of value capture.
In estimating synergies, it is crucial to consider the investments in management time and attention so that there is no damage to both the underlying and the acquired business. In the case of mergers of equals, this ends up being one of the most vital swing factors in terms of value creation.
Combinational vs. Transformational Synergies
Three synergy levers that are relevant to every M&A deal is cost, capital, and revenue. The value creation levers for such transactions could be general and administrative (G&A) expenses reduction, on the revenue side, cross-sell synergies or, on the capital side, capital expenditures, and working capital management.
Combinational synergies are the synergies connected in drawing two organizations together and eliminating redundancy. Transformational opportunities, especially with more significant deals, are more critical even at the cost of combinational synergies. It is necessary to examine all of these at different points in the process, not merely in the strategy.
Acquirers don’t give adequate attention to capital opportunities. Cost opportunities are a bit more obvious, but how one believes about working capital and capital expenditure efficiency for a specific deal can be an exact value driver. Furthermore, companies that are aspirational when they do a transaction often put too much into the transformational opportunity bucket. They choose five or six large-scale transformational opportunities to proceed, and that can divert from the base-business combinational possibilities.
Source – Mckinsey Analysis
Revenue synergies take longer to effectuate than a cost synergy, which can be a day one savings. In an acquired investment, sometimes you have to put capital into getting salespeople to a new region, and it can be challenging to track the revenue synergy dollar versus a standard sales dollar.
The deal model should control the synergy potential.
It is crucial to comprehend how the distinct synergy categories pertain to the type of deal the acquirer is doing. Acquirers usually slip into a trap where they get into a pattern about how it conceives about value creation. Then, when acquirers do another type of deal, buyers often approach the asset in a way that is consonant with their earlier deal archetype when they should be basing the synergies on the basis for the current deal.
For instance, if, in significant industry consolidation, two companies that do the identical business and have the equivalent manufacturing footprint acquire each other, there are numerous cost synergies in concentrating on the combination and advancing business momentum. That is a very distinctive plane of strategy than if buyers do something like a corporate transformation, which is significant but thrusts it into an adjacency, a separate vertical, or a distinct part of your value chain—the entire mindset around synergy changes. The acquirer moves away from traditional combinational synergies, the elements that are much more tactical to execute and get into more strategic issues like is it earmarking capital behind the strategy? In case of an IP acquisition or an innovative business model, very seldom can the deal itself provide all the investment needed to build a new business?
Companies need to make sure that, as they deliberate on an M&A strategy, they appreciate how both the mix and the pertinence of those different synergy levers might vary, so people in the organization are not arguing past each other.
The co-relation between Synergies & Transaction Premium
What a company funds for in an asset should not relate to the synergies targeted. Synergies will be one of the objects that apprise what a company pays, but there are a host of other things. Synergies versus premium or EBITDA multiple are not correlated significantly. It will be more applicable to some industries. In cases where cost synergies aren’t a determinant in terms of the multiple or the value creation narrative, then synergies will not be correlated at all with the multiples. In sectors like tech, the competition, the industry dynamics, and other elements like that will tell the premiums paid, not the synergies.
Speed matters in Synergies consummation
A good rule of thumb is, on most items—in specific on headcount—the buyer should proceed quickly to evade business disruption and squandering momentum on its base. The businesses that do this well; they get past that always-messy integration phase and move to the company as usual as quickly as possible, so their core executives can turn back to concentrating on the core business.
The rule of thumb is 18 months. The buyer should have the broad majority of synergies achieved then. Some items have a lengthy tail, like IT systems, network consolidation, facility footprint consolidation, and optimization, but most headcounts can get completed within a hundred days of close.
Importance of Cultural alignment in synergies realization
Cultural alignment is a crucial factor, but it’s more material in some types of deals than others. The buyer needs to identify very early in the deal process, is culture going to be a determinant going ahead? Sometimes, The acquirer is buying a distinct culture, and Sometimes they are just absorbing someone. So, first is recognizing what one wants to get out of the deal. Attempting to buy a culture as a consequence of a transaction is plausible, but it’s very arduous. The acquirer has to be realistic about the culture of the target it needs to protect, and have to handle that action unless it’s an onboarding.
Sometimes the value comes from the onboarding, in which case the firms want to make sure that they have the capability. Is the buyer the kind of organization that is going to be accessible to work with for a newly onboarded employee? For instance, is role clarity high at the company, indicating, are people’s jobs their jobs? Or, if the firm acquires somebody, will it be difficult for them to comprehend how things get done? Do managers give explicit directions to the company or not? The vast majority of transactions are onboarding events, and having an honest discussion about the own culture will be a decisive factor in the synergies the firm gets. Are the buyers the sort of company that is skilled at acquiring because they make new employees successful? That is a question every acquirer should examine itself before they proceed out and pay billions of dollars on acquisitions.
Integration costs for capturing Synergies
These are one-time costs, and they usually don’t suggest firms do or not do the deal. If the firm has to spend $100 one time to get $100 in recurring synergies, that’s a significant investment that can have a material impact on cash flow, and the board will worry quite a bit. Companies are spending 1.1 to 1.2 of integration cost to run-rate synergies, which implies that the company will receive $100 million in synergies run rate. On average, its one-time expenses are roughly $120 million.
Revenue synergies – A shaded area between costs and capital synergies
Organizations, on regular, don’t appear very comfortable setting a number associated with revenue synergies. When one considers about cross-selling, to be successful, one has to sell to the same customer; in that customer, it has to be the corresponding buyer. That buyer has to have the same buying process, and the sales rep has to have both capability and the technical expertise to sell that product efficiently.
Revenue synergies take a little longer, firms need to recognize the sources, and there are three areas one can classify.
One is where you sell, which covers new channels, cross-selling to existing customers, geography expansion.
Then there is how you sell that is where the sales force’s effectiveness or channel coverage implies. Then there is what you sell. Is the transaction bringing new products or new bundles to market? Decomposing where the revenue synergy emanates from can usually be an excellent approach to provide some structure and assists in confirming which of these acquirers are more probable to accomplish.
[…] Synergies – Cost/Revenues synergies do not come for free and have a financial cost. Thus, when we value synergies, we need to account for the timing and amount of synergies realized along with the incremental expenses required to deliver the synergies. For instance, the buyer values the target and then decides it has to lay off 10% of the target’s workforce to deliver on the cost synergies. If the buyer pays the severance costs after the deal closes, it disrupts the integration resulting in unanticipated shareholder losses. The better alternative is to restructure the target before closing, and the buyer shares these severance costs with the target. […]