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In brief
Despite ongoing market turbulence and increased scrutiny of merger and acquisition (M&A) valuations, large companies in sectors ranging from oil and gas to health care still have big appetites for highly sought-after digital technology companies.
These companies are on the hunt for acquisitions that can help them rapidly digitize the supply chain, enable digital customer experience, and bolster cybersecurity.
In fact, in the EY-Parthenon Digital Investment Index of more than 1,500 global companies, 55% say they are pursuing inorganic investments, including digital mergers and acquisitions (M&A), to speed innovation.
Recent EY-Parthenon research indicates that for deals to be successful, companies should focus on achieving revenue synergies in M&A integration to address growth, industry convergence, enhancing research and development, and developing digital-centric solutions.
While achieving M&A cost synergies is still important, recent deals that focused on revenue synergies appear to obtain significantly higher valuations and deal premiums compared to those that focused on cost reductions through consolidation and other actions. This increases the need for the buyer to create value during the integration.
By increasing focus on revenue synergy levers, leaders can better justify deal economics and craft a thoughtful implementation approach to realize the value and achieve growth targets.
EY-Parthenon experience on growth-oriented deals under $1 billion suggests that companies often expect a revenue synergy of two to five times the target’s revenue. Many companies cite growth and revenue synergies when announcing deals and presenting deal rationalization. However, they often lag in realizing M&A revenue synergies because integration strategies and operating models are not aligned with the deal thesis. Companies also often fail to devote the time required for M&A integration as well as the synergy planning, execution, and tracking.
Some deals fail to achieve revenue synergies due to limited buy-in from business unit leaders inheriting the acquired company, lack of specific sales targets across sales channels and teams, not enabling the required operating model (sales structure, incentives, etc.) to deliver on the planned synergy goals, and inadequate reporting and tracking.
Companies that spend the time up front designing the revenue synergies and thinking through expansion opportunities can realize bigger and faster top-line growth.
When designing revenue synergies, companies need to evaluate many revenue levers, such as the current customer base, go-to-market model, pricing, product portfolio and route-to-market alignment, as these are often linked to each other. Executives can begin the process of evaluating revenue synergies by focusing first on the following key levers:
Identify new markets, segments and industries with a supporting operating model that the combined entity can effectively penetrate with both their existing and bundled offerings.
Evaluate the combined research and development capabilities to drive better co-creation and customer stickiness instead of the traditional route of product innovation through line extensions.
Leverage existing customer relationships and sales force incentives to cross-sell an expanded portfolio of combined products and services to increase customer “share of wallet,” access new markets, sell through additional channels and create new bundles and solutions, and rebrand products.
Pricing is key to get right. Based on the new and existing customer segments, expanded portfolio and GTM approach pricing should be reviewed as early as possible to drive sustainable penetration while addressing the current input costs and inflationary pressure.
Specific activities that will lay the right foundation include developing guiding principles for integration, defining and creating a target-state operating model, instilling governance mechanisms, conducting synergy pipeline reviews, qualifying future opportunities and identifying target customers. These activities will become the backbone of how the future business will operate and where the revenue synergies and future growth will originate.
Realizing deal synergies is easier said than done. Key factors include:
Understanding each company’s customer base, GTM structure and channel performance will help refine the business case during the pre-deal phase. It will also give a head start during the post-deal phase to develop a strong integration and GTM strategy up front.
Starting early and using a clean room can help drive clarity across sales channels, align back-office processes to avoid potential customer experience issues, establish an execution roadmap and improve the employee experience through enhanced communication and collaboration.
The revenue synergy sources and targets should drive the integration strategy and combined operating model. Companies should determine which synergies offers the most value and accordingly develop internal stretch targets to increase the likelihood of achieving the synergy targets. Targets for the transactions team should be around 20%–30% greater than publicly stated goals.
A business case for achieving revenue synergies should include the level of time, effort and investment required to get there. Companies can use quick wins to avoid losing momentum post-close and to keep the GTM team focused and engaged. They should also implement a robust tracking process to measure the success post-close.
This can drive cross-channel collaboration, including among sales teams, to execute on revenue opportunities identified during the pre-sign phase and improve synergy performance by focusing leadership attention, cross-selling and rapidly mobilizing alliance partnerships.
Make sales teams invested in success by designing unified performance metrics and aligning incentives and sales motions or steps required to sell a product, driving effective onboarding, improving cultural compatibility and aligning personal success to synergy targets.
Realizing target revenue synergies during M&A integration, particularly with respect to digital acquisitions, requires companies to spend the time upfront to design revenue synergies, develop a thoughtful implementation approach, and establish a synergy realization plan that is aligned with the deal thesis.
Companies need to carefully consider multiple revenue levers that are often linked to each other and take actions such as enabling cross-selling, driving collaboration among sales teams, mobilizing alliance partnerships, and improving morale. Failing to focus on revenue synergies can mean a deal that once looked promising is now viewed as a frivolous misadventure that failed to meet market expectations, led to lost opportunities and missed financial goals.
While mergers and acquisitions may be slowing due to current market conditions, the quest by large companies for acquiring the hottest technology startups continues. These acquisitions that can help them rapidly digitize the supply chain enable digital customer experience, and bolster cybersecurity.
Recent EY-Parthenon research indicates that for deals to be successful, companies should focus on achieving revenue synergies in M&A integration to address growth, industry convergence, enhancing research and development, and developing digital-centric solutions. Failure to focus on revenue synergies early on can result in deal failure.
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