Author: Lode Verbruggen
The number one motive for companies to merge with or acquire other companies is to create synergies. Even though most M&A processes are carried out methodically, more often than not the perceived synergies fail to materialize or prove to be overrated.
Usually this is attributed to significant cultural differences, skeletons in the closet or poor post-merger integration. However, according to our experience, in most cases the numbers just didn’t add up from the beginning. Typical examples are unjustified revenue forecasts or underestimating the impact of rebranding.
Likewise, we also come across many missed opportunities such as not leveraging the best capabilities of both sides or omitting more transformational synergies.
Our 9-3-1 synergy frame supports a thorough identification of all potential synergies and an accurate assessment of the benefits synergy. Next to this it also allows to proactively tackle any potential dis-synergies.
A proper fact-based analysis of the perceived synergies will allow for a more realistic picture and can lead to either one of three outcomes: a reassurance of the benefits of an integration, an honourable withdrawal or a substantiated choice for another form of collaboration.
Phase 1: should you collaborate?
A merger or acquisition – either friendly or hostile – is a form of collaboration; hence, the first question you should ask yourself is: “should we collaborate?”
As working hypothesis, the collaboration makes sense from a business point of view. Now, let’s try to substantiate this case. First, we identify all relevant synergies as individual initiatives, which have benefits, efforts and risks attached to it. For completeness you can formulate these initiatives from two dimensions:
The first one refers to the benefit you aim to achieve:
How can you reduce the current costs of doing business? - In general cost reductions are the fastest and most probable initiative to occur.
What initiatives or combined assets can increase revenues? - Note that here overestimation's are likely; so make sure you can defend each initiative.
What are the positive effects from an investment or financial point of view? - Avoid focusing on benchmarks and try to fully elaborate how you will achieve this.
The second one focuses on capabilities of both organisations:
You can “expand the core” by pooling current capabilities to be more efficient, e.g. by creating a stronger negotiation position or cross-sell products.
Transformational synergies – often omitted in M&A analyses – can be very significant. Some transformations will be much harder to achieve without the collaboration. Examples are plentiful; combining new capabilities to build innovative value propositions, co-develop new markets, build joint digital assets, etc.
Finally, each collaboration can potentially create dis-synergies; so, don’t forget to formulate how you will “protect the core“. How will you prevent the loss of identity or mitigate union actions?
Next, describe your initiative cases as concretely as possible. We recommend you to at least include the following elements:
Verifiable hypothesis: Why will this initiative create value?
Quantitative benefits: How much value will be created? (e.g. EBITDA impact at run rate)
Efforts and risks: What will we have to do to undertake this and how likely is the initiative to succeed?
Phase 2: how should you collaborate?
If you conclude that the benefits of collaboration are plentiful it is always a good idea to evaluate the best form of collaboration.
In some cases, most of the benefits can be achieved with a distribution agreement, sharing assets or creating a joint venture. Here you might want to avoid the risks associated with a merger and aim for a less engaging form of collaboration.
When you’re considering an acquisition or a merger, make sure your method for identifying and evaluating synergies is sound. Our framework allows for a holistic approach of both the synergies and dis-synergies related to collaboration.