January 30, 2018
Every deal comes with a promise. And whether it’s about saving money, making money or both, that promise is generally based on synergies. Capturing synergies is often the holy grail of M&A transactions and the reason why shareholders get behind the deal. It’s also where the rubber meets the road for management, because now they’re on the hook to deliver. If they don’t, the consequences can be dire: plummeting share prices and potential leadership exits, including members of the C-suite and even the board.
It does appear that dealmakers are getting better at capturing synergies. According to M&A Integration: Choreographing great performance, PwC’s 2017 M&A integration survey report, companies have made significant progress in realizing both revenue and cost synergies. In 2013, only 54% of companies reported favorable or very favorable results in capturing revenue synergies. In our latest survey, it was 83%. Two-thirds reported positive results for cost synergies in 2013. Now, it’s up to an impressive nine out of 10 companies.
So what explains these improvements? What are companies doing better? Here are some leading practices for synergy capture success:
Establish a formal process. Companies can improve deal success by delivering a repeatable, scalable M&A process that also evolves with the organization. A well-structured process instills the right tollgates and discipline to drive successful acquisitions, from deal sourcing through due diligence and integration.
Start synergy planning early. Companies consistently experience challenges with accurate identification and validation of synergies during the early stages of due diligence. This is often because due diligence tends to focus on other priorities, including researching the target organization’s financial position and risk profile. Information and access to target company people can also present challenges with synergy validation. Acquiring companies can improve their chances of capturing synergies if they bring in a broader team during due diligence, including individuals with in-depth understanding of the target organization’s markets, products, channels and functional units. This kind of team can better validate synergy potential and build more accurate forecasts and earnings-per-share calculations.
Don’t make promises you can’t keep. Identify a strong team to validate potential synergies and build compelling business cases that deliver realistic expectations. Management needs to resist the temptation to overstate what can be achieved in terms of revenues or cost savings. This may result in overwhelming enthusiasm for the transaction in the short term, but in the longer-term, response from shareholders may be disappointing.
Select integration initiatives based on value potential. It simply isn’t possible to immediately realize every synergy in a merger or acquisition, particularly since the nuts and bolts of integration often dominate the early days following a transaction. It’s critical to prioritize initiatives based on their ability to drive the most shareholder value – namely the 20% of actions that deliver 80% of economic value. These high-value activities should be further prioritized based on probability of success. Activities that meet these two criteria – high value generation and high probability of success – are likely the ones that should be implemented as soon as possible.
Measure and monitor synergies. Keeping tabs on synergies achieved, translating them into dollars and cents, and then communicating that progress externally is extremely important. Companies that do this well have tracking processes and tools that define synergy targets and monitor them individually. They also comprehensively measure the economic value added by each acquisition.
Tie compensation to synergy goals. This may seem obvious, but in the past it hasn’t always been put into action. This is changing, however. According to our survey, CEO and board compensation is increasingly tied to deal success: In 2013, only 28% of companies reported that CEO compensation was linked to deal success. That surged to 63% in our latest survey.
The recent spate of mergers has come with lofty promises about the potential for synergies. To keep your company on the road to success, achieving these synergies will hinge on effective due diligence, strong prioritization of post-transaction activities and a formal process for making it all happen in an orderly manner. For additional information on the factors for delivering synergies to capture value, view our new video.