Mergers and Acquisitions: 3 Critical Steps to Realize Synergies
by GPMIP Partner, Scott Whitaker
Anyone who is involved in mergers and acquisitions can probably share a story or two about failing to achieve synergy goals.
Targets that were baked into the deal thesis looked promising, but never materialized in full (or on time), on the balance sheet.
There are plenty of gloomy statistics claiming that 60-80% of deals never fully deliver on planned synergies. Why?
Certainly unrealistic targets and changing economic conditions can undermine a synergy plan, but the majority of synergy “busts” occur due to poor synergy program management.
In this article we outline 3 important steps to improve your ability to plan, execute and deliver on synergy targets. These steps cover the most common deal requirements. Every transaction is unique. Use the following steps as guideposts and supplement where circumstances dictate.
Step 1: Validate, Validate, Validate
Synergy goals are formulated from current and available information during pre-deal and due diligence activities, where information and scrutiny is limited due to time and legal constraints. Original synergy goals can be extremely aggressive to help secure deal approval by outside investors and boards. Also, assumptions that were made early in the process may be disconnected from the realities of the current operating environment.
Either way-the IMO (Integration Management Office) must drive integration team leads (and the true synergy goal “owners”) to begin validating synergy targets as soon as more sensitive data can be exchanged and processed more freely. Once this is completed they can confirm whether the revenue or cost saving initiative targets are realistic, and attainable in the projected timeframe.
Critical factors to validate include:
- Risk: Will the synergy goals and realization timeframe potentially cause adverse business disruption? (e.g. closing a facility and disrupting production will result in customer and market share loss)
- CTA: Are the costs to achieve (CTA) estimated, validated and budgeted?
- What are other “opportunistic” synergies that have been identified based on access to information that could make up any shortfalls?
- Is outside expertise (e.g. external supply chain experts) required to achieve the goal?
- Do synergy targets need to be recalibrated across business units, synergy categories or years? (e.g. the target for year 1 in one business unit needs to be lowered but can be made up in year 2 in a different business unit)
Step 2: Connect the synergy goals to tangible integration initiatives
Each underlying initiative that supports the attainment of a revenue or cost synergy needs to be clearly articulated and assigned within the master integration plan (e.g. any headcount reduction goal will have several key HR initiatives that need to be included in the HR functional workplan to ensure completion, and thus realization of any headcount reduction synergy targets).
Project management tactics include:
- Create a master synergy tracker that breaks down the synergy goals into key workstreams
- Create a forecast that distributes the realization timeframe by quarter (and update and reforecast as needed)
- “Connect” the key work streams to the underlying initiatives in the master integration plan to ensure accountability (for example, a cross selling revenue synergy will include numerous initiatives that may involve IT, HR, S&M, Customer Service etc., and which all need to manifest in the master workplan in terms of responsibility, timing, status, dependencies, milestones etc.)
- Track initiative status weekly to quickly address execution issues and other risks affecting high priority tasks impacting synergies
Step 3: Confirm how “actuals” are tracked and where/when they will impact the P&L
Tracking “actuals” (the realized amount of costs saved or revenue increased due to the transaction) can be difficult. Figuring out how to accurately measure actuals early can help avoid the problem of being unable to truly verify a synergy benefit and its impact on the P&L.
Challenges to address for actuals tracking include:
- Having to pull data from disparate systems and consolidate manually
- Parsing what is truly “incremental” revenue from what might have been attained organically
- Confirming where & when a cost saving or revenue benefit will show up (in what system, budget, report etc.)
- Confirming who/where to attribute the synergy to avoid any “double dipping” issues
Having a plan to confirm how actuals are tracked and addressing common challenges will aid the integration team in successfully reporting and managing synergies.
Ideally, these 3 critical steps to realize synergies should be completed within 90 days of close allowing synergy targets to be validated, deconstructed into actual initiatives, and tracked during the early life of the integration.
Scott Whitaker is a partner at Global PMI Partners, an M&A integration consulting firm, and has been involved in over three dozen mergers and acquisitions totaling nearly $75 billion in value. Scott develops industry leading training programs designed to help companies expand their M&A knowledge and Post-Merger Integration competency. To learn more about Global PMI Partners’ upcoming course Integration Essentials For Platform Acquisitions focused on synergy realization, visit http://synergy.gpmip.com.
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