During a recent client engagement, we presented the company’s executive staff with the rationale and approach for a comprehensive process of deal measurement and feedback. After our meeting, the firm’s integration manager teasingly chided us for “messing up a pretty comfortable arrangement.” “Until now,” he explained, “our executive team has had a ‘Don’t ask, don’t tell’ policy surrounding mergers. I don’t ask what the next deal is going to be, and they don’t ask me how the integration of this one is going.”
Here’s a toast to simpler times—may the memories be pleasant. For the vast majority of acquirers, however, everyone is held ruthlessly accountable to the synergy beat. The market is brutal, and historically, it has punished those management teams that were not consistently at the top of their synergy capture game on each and every deal. Yet, in spite of the importance of getting this aspect of your M&A capability down to a fine science, we still find many organizations struggling to achieve the full, anticipated deal synergies in a timely and well managed way.
Before presenting some possible considerations for improvement, let’s “put the skunk on the table” and get real about the challenges everyone faces with synergies.
"Poor execution is still more to blame for synergy underperformance."
Revenue synergies are harder than cost synergies. In our recent survey, The State of M&A Integration Effectiveness™, 61% of respondents indicated they “typically meet or exceed” cost-reduction synergies while only 48% indicated they typically meet or exceed revenue growth synergies. There are many good reasons for this disparity. Most organizations have been through successive waves of cost reduction, re-engineering, restructuring and countless other cost optimization projects, whether or not they are driven by an M&A. These are known game plans, with a solid experience base to build on.
Revenue synergies, on the other hand, are often more dependent on variables requiring new skills; new methods; new products or services; new channels; or even a new customer value proposition. This is one reason we often advise that revenue synergies (especially cross-sales) only work if customers buy into your deal’s value proposition. (For more on this discussion, please refer to The Synergy Trap). Obviously, this same dilemma also applies for any synergies that are outside your core business or core capabilities.
Poor execution is still more to blame for synergy underperformance than poor strategy or validation. I have to be careful here, because these are heavily intertwined and interdependent. The same is true of overall deal failures, not just synergy failures. Deals can and do still fail at any phase of the process, including strategy, due diligence and integration. You have to get all three phases right for the deal to work. One of the first truisms my mentor drilled into me was that, “Bad planning and execution will kill a good deal every time, but the best due diligence and integration in the world can never save a bad deal after it is done.”
The same exact dynamic is at work on each and every synergy in your financial model. You’ve got to have strong capabilities for identifying synergies; validating and modelling them; developing robust capture plans; and finally, strong synergy execution and implementation skills. Anything less is a recipe for sub-par performance, or worse.
At this point, I’m reminded why my friend and colleague Jack Prouty, President of the M&A Leadership Council advises, “Most companies should cut their synergy estimates in half and double their integration budget.” But that’s for another blog post.
For this post, my objective is to brainstorm some proven ideas that have helped other M&A teams get better at capturing synergies. Rapid Assessment: Managing for Maximum Synergies poses ten questions about how you typically approach and manage synergies from identification and validation to governance and execution. Admittedly, this is a complex topic, and this list barely scratches the surface, but we’ve seen that solid progress on these ten fundamentals can make a significant difference in deal success.