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Make it or break it: Case study using a risk-based approach to achieve synergies - EY - Global

Make it or break it: driving value through integration

Case study: using a risk-based approach to achieve synergies

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The situation

Deal exuberance can lead to overstatement of synergy value. The same can be true of any failure to plan and prioritize resources for the realization of synergies.

Concerned this might be the case for a recent acquisition, six or so months post close - still in the midst of integration - a major energy company organized and executed a review of the deal performance (TVA).

In so doing, the company found that not everything was going as well as hoped for.

The issues

In a number of cases, integration efforts were not focused on the most critical drivers of synergy value.

In addition, the company learned that its deal team and operating managers had made a number of miscalculations in terms of the timing and value of synergies, leading to a degree of overvaluation.

In one case, anticipated synergies could not be realized due to significant and unbudgeted up front capital costs.

The TVA also revealed that the deal team had overlooked a handful of significant transaction dis-synergies. For example, the valuation team neglected to account for the salaries at a new location, and the company had also not realized the degree to which deal fatigue was setting in.

Due to failure of the deal team and operating managers to properly estimate the resources needed during integration, many existing employees were overworked and, as a result, significant numbers of valued employees were leaving the company.

Opportunities for improvement

Though disappointed by much of what it learned, the company recognized that undertaking a review of performance could help pave the way for greater success. A key tool introduced into the process was a risk-focused model for establishing priorities.

The company listed each key synergy, along with its forecasted value. Then, based on an analysis of progress-to-date as well as future challenges, the company rated the likelihood of achieving each of the synergies at this point as "unproven," "possible" or "probable."

By updating its progress against its full set of synergies - and the potential value of each synergy - the company was able to better prioritize its efforts going forward. As for the TVA process overall, the company continues to use this method to improve its deal-making processes.

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