by Tom Allen
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Closing a deal is difficult – however, the capturing of synergies post-deal is arguably even more difficult. The objective of M&A is to create value – yet once the dust has settled, “deal fever” has subsided and post-merger integration is underway, it is easy for an acquirer to lose sight of the goal of synergy capture.
For a deal to deliver the intended value, it is vital that synergies are captured in a timely manner. To a large extent, the value created from a deal is contingent upon how an acquirer manages and executes value capture opportunities. The most successful acquirers will adopt a measured approach and take the time to plan, carefully execute and track the progress of synergies. To do this, 5 key steps can be taken:
1. Preliminary Analysis
Preliminary analysis is typically performed in the early stages of the M&A pipeline – this is usually based on limited information (such as financial statements and reports available in the public domain) and pinned to “best estimate” basic assumptions. Potential synergies will first become apparent in the process of researching a target pre-due diligence – however, it is important to note that synergies identified in the early stage should be regarded as guidelines only. As more information on a target is collated (via an initial and then more detailed M&A due diligence exercise) early assumptions can be refined and preliminary analysis made more robust. However, at this stage of the deal-lifecycle, the financial model in which synergy estimates will most likely be mapped will be relatively high-level and not certain enough to base key decisions on (see here for more on estimating synergies).
M&A synergies may be categorized as revenue, cost, process or financial.
- Revenue increases - these can be achieved via selling a greater quantity of products and/or services via broader distribution channels (including new geographies), product innovation and leveraging existing sales platforms (such as via cross-selling);
- Cost rationalization – an acquirer may streamline its variable and fixed cost base – such as via removing duplicate office functions and surplus employees. These synergies are likely to relate to the income statement;
- Process optimization – this can be achieved by implementing more efficient marketing tactics and strategies, re-branding exercises, adopting innovative technologies and utilizing more efficient distribution channels;
- Financial rationalization – an acquirer may benefit from a lower cost of capital (capital optimization), tax benefits, higher debt capacity, better AR policy, working capital management, etc. once it integrates the acquired company. These synergies are likely to relate to the balance sheet.
2. Prioritize Value Drivers
A starting point to capturing synergies is to prioritize value drivers (the factors underpinning synergies) in preparation for execution and synergy capture. A point to note here is that not all synergies identified and estimated in the preliminary analysis stage will be captured – an acquirer will simply have too many areas to focus on post-deal and finite resources to work with (making the wrong assumption that all synergies will be captured is one of the reasons for over-valuing an acquisition target – see more here). Rather, the “easy wins” should be targeted – i.e. the synergies that will yield the highest return/increase shareholder value for the least effort.
Easy wins are most likely to (i) be closely aligned with the strategic rationale underpinning an acquisition (ii) present the highest probability of success (subject to resource and time constraints) and (iii) be capable of being accurately measured and tracked.
An acquirer should focus its efforts on capturing synergies which fall in Box 1 – these synergies have the greatest financial impact and probability of being successfully captured given the resources available (people/time/budgets, etc.).
3. Develop a Business Case
Once an acquirer has prioritized the synergies it will seek to initially capture, a business case should be developed for each synergy– this should map out the purpose of the targeting a particular synergy and the expected benefits (both quantitative and qualitative).
A business case should start with the synergy estimates identified during M&A pipeline management as a part of the preliminary analysis stage. From here, synergies should be looked at in terms of their component parts – this stage builds upon earlier analysis but should go beyond financial considerations in the sense that operational factors should also be considered (i.e. how will the synergy actually be captured?). To measure the success of the business case, quantitative areas can be used as the metrics for performance tracking – qualitative areas can be used to gauge how the plan is actually being executed.
Quantitative areas of a business case should include:
- Financial analysis and impact;
- Measurement metrics;
- Expected time frame to capture.
Qualitative areas of a business case should include:
- Detailed description of the value driver(s) comprising the synergy ;
- Key action steps required to capturing;
- Operating assumptions;
- Potential risks.
Once a business case has been prepared, a more specific project plan can be developed for each synergy – this is the post-merger integration plan the team will work from when capturing synergies.
4. Project Plans
Building upon a business case, a project plan should adequately outline the tasks that must be undertaken to capture a specific synergy. A project plan might be granular in detail and should outline the individual(s) assigned to the task, how other resources will be allocated to the task, the due date for completion, key dependencies and any other critical matters relevant to the task. This process could be managed using an Excel log, which is updated manually on a regular basis (see here). Alternatively, a digitalized approach could be adopted – M&A software enables integration workstreams to collaborate in one place, track task progress in real-time and work much more efficiently with one click reporting.
As project plans are executed, progress against synergy capture should be tracked. Doing so enables workstreams to monitor progress against goals, identify and resolve issues in a timely manner and ensure that value is being captured as planned. The tracking of synergies is imperative for reporting later in the integration process – without tracking deal value can be lost and lessons cannot be learned.
Tracking the progress of synergy capture across an integration project ensures accountability of workstreams and individuals assigned to specific tasks and can help ensure that an acquirer is on track to achieving the intended deal outcome.
Adopting a centralized approach to monitoring, tracking and reporting synergies is most likely to ensure an acquirer stays on task across an integration project. The metrics for synergy tracking should be pinned to the synergy estimates outlined in a specific business case (a business case will have set out a specific quantifiable synergy goal so it should be possible to benchmark financial progress against this).
The deal life-cycle does not end when a deal closes. Rather, this is when the hard work begins in earnest. For a deal to yield the intended results, a methodical approach to capturing synergies and creating value should be adopted – this involves estimating synergies, prioritizing value-drivers, developing synergy-specific business cases and supporting project plans and effective execution. Taking these steps, which can be facilitated by deal management software, will help to maximize the chance of synergies being captured and an M&A campaign being successful.