3 minute read 8 Oct 2018

Post-deal integration should be a pre-deal consideration

By

Brian Salsberg

EY Global Buy and Integrate Leader

Passionate acquisition and merger integration leader and aficionado of all things deal-related. Global citizen. World traveler. Husband. Father of two.

3 minute read 8 Oct 2018

Integration has moved front and center on the M&A agenda, notes our latest M&A report.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

Many have failed to meet synergy goals historically, but the future looks more upbeat. The identification and realization of synergies are at the heart of M&A value creation — but this is only the start of the journey.

Executives are signaling that they are preparing for post-deal integration earlier in the deal life cycle than they have in the past. Acquiring companies will capture synergies effectively only if they map them out upfront and assign accountability for monitoring their progress. 

However, this requires experience of understanding and identifying where value can be created, what is proven to work and where the risks lie. To secure competitive advantage, value needs to be identified early, often with limited information.

Ideally, those responsible for achieving synergies should play a direct role in identifying and valuing specific synergies. Business units should help develop synergy assessments and promote buy-in very early in the process.

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Past experience of failing to achieve synergy targets looks likely to change future behaviors. 

Nearly half (49%) of respondents failed to meet their synergy targets on their most recent deal. However, a correlation of responses to our survey questions reveals some interesting insights on what needs to be done differently to meet synergy targets on future deals.

Those who are more aggressive in setting synergy targets are more likely to achieve or exceed targets. Over two-thirds (69%) either met or achieved higher synergies than expected.

Most interestingly, respondents who plan to start integration earlier on future deals have likely been influenced by recent experience. Two-thirds (66%) of respondents who are looking to move integration plans forward in the deal process had achieved lower levels of synergies than originally targeted in their most recent deal.

A cautionary insight: half of respondents who did not plan to change their synergy strategy on future deals, under-achieved their targets on their most recent transaction.

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Synergies can be the competitive advantage in a bidding process. They are a major part of the narrative that executives use to explain the strategic objectives of a transaction to their own boards, shareholders and the market.

Reducing duplication and maximizing efficiencies, together with the potential boost from technology, is driving synergy strategies.

Those respondents who primarily focused on bottom-line or top-line synergies were more successful in their post-deal integration. In both cases, more than half met or exceeded expectations. But for those who relied on applying technology and intellectual property (IP) from one company to the operations of the other, results were less positive. The majority (67%) under-achieved their synergy targets in their most recent deal.

However, executives may need to look beyond the first 12 months to assess the longer-term benefits of technology and IP value creation. Technology and IP synergies may lead a buyer into new markets or entirely new business lines — creating products or services that existing customers will welcome. These may also take longer to make an impact on the acquiring company’s top or bottom line. They should consider implementing bespoke integration solutions for technology-based assets to maximize and accelerate value creation.

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Companies that spent more on the integration process outperformed their pre-deal targets.

As well as starting planning earlier and building the right integration teams, companies should realize that success comes with a cost attached. 

Those companies that met or exceeded their original synergy targets spent on average of 8% more (as a percentage of announced synergies) than those that failed to meet their ambitions. But the successful integrators also targeted 8% higher synergies as a share of deal value.

Summary

Whether companies are trying to achieve bottom-line efficiencies or new routes to market — often  fueled by access to new technology — they are developing new approaches to integrate acquired assets more successfully. Download the full report (pdf).

 

About this article

By

Brian Salsberg

EY Global Buy and Integrate Leader

Passionate acquisition and merger integration leader and aficionado of all things deal-related. Global citizen. World traveler. Husband. Father of two.