(Charlotte, NC – November 21, 2017)
Identifying Synergies –
This month we finish our series on six principles for successful acquisitions. Below, we elaborate on the sixth principle: “match your leverage points with their strengths.”(1)
Identify synergistic opportunities: Corporate development executives should continuously find specific ways to match their leverage points to the targets’ strengths. In other words, assess the potential transaction for synergistic opportunities. Eliminating duplicative corporate functions and overlap among sales and marketing functions is a type of synergy that has a high probability of realization in a short time frame. Economies of scale achieved through procurement can take longer to realize and are more difficult to estimate. Revenue or distribution synergies are typically the most difficult to achieve and take longest to realize, but can add significant value over the long run. Achieving any of the synergies described above would allow the combined entity to generate better results than either could alone.
Be conservative on synergy estimates: Most synergies are estimated during due diligence, before companies have a clear understanding of the impact of increased scale and distribution channels or the challenges of integration and synergy realization. Additionally, companies may set aggressive synergy targets to justify a deal price. In a 2014 Bain & Company survey of 352 global executives, overestimating synergies was the second most common reason for disappointing deal outcomes.(2) There are often significant costs (e.g. severance, training, relocation, and other overhead costs) that can be overlooked when approximating the total benefit of synergies. Furthermore, corporate development executives should consider the probability of achieving certain synergy types when making estimates. Revenue synergies, either new products through existing channels or existing products through new channels, can be the most difficult to achieve and take the longest time. Revenue synergies created by new products through new channels are the most elusive.
Learn from example: One example of a transaction that far exceeded the projected synergies is the creation of AB InBev, the world’s largest brewer, from the 2008 merger of Anheuser-Busch and InBev. InBev ultimately beat an already ambitious announcement by generating synergies of $2.25 billion, much more than could have been expected from scale alone. On average, merging consumer products companies increases EBITDA by 3.2% of target net sales. In the case of the AB InBev merger, those synergy gains resulted in a 16.8% improvement over a three-year period following the transaction. InBev used its original deal thesis to establish integration, oversight and change management programs from the outset of the transaction. It then set targets and ensured the right tools and processes were put in place to manage synergy realization across the newly combined entity.(2)
Negotiate who pays: Because projected synergies can either create substantial value or fall short of expectations, determining who pays for the synergies is often a tensely negotiated issue. A seller will often argue that the buyer should pay a higher valuation because of those synergies, particularly in a competitive process. A strategic buyer can and should counter that they will assume the execution risk to achieve the intended value. While it varies by transaction, corporate development executives should weigh the risk and return associated with including the value of synergies in their valuation analysis.
Review the previous newsletters: If you would like to recap previously published articles within our series on the six principles for successful acquisitions, the links are listed below: