Not all synergies are created equal, so to speak, and many acquirers continue to fall into what has often been called the “synergy trap.” This important principal was brought into stark contrast for one of our consulting teams not long ago.
The situation was already pretty desperate when we were engaged nearly two years after the deal had actually closed. The deal’s original value proposition sounded straightforward: the buyer, a major financial services company, bought a much smaller, but highly respected market leader in a niche segment that represented both an important product-line extension opportunity for the buyer, and a strategically important new source of revenue growth. (For more information on “Deal-Type DNA,” see Making the Main Thing the Main Thing).
"Achieving the cost synergies are usually just the starting line, not the finish line, of making your deal a success.”
Yet, in spite of such great promise and a significant purchase price premium, very little value creation had been realized other than some nominal cost synergies. Our job? Help identify what went wrong and get things back on track toward achieving the intended objectives of the deal. Our findings? A classic case of falling into the synergy trap:
- There was not an effective integration strategy linked to the original deal value proposition.
- Well-intentioned functional teams captured the “low-hanging lemons” (e.g. easy, but low-impact cost synergies) while missing or glossing over the longer-term, but much more important revenue growth synergies.
- Management was unknowingly complicit with this blunder due to their acceptance of unrealistic synergy plans, which were mostly unsupported by meaningful resourcing or implementation budgets.
- Last, but not least, the deal team failed to effectively validate the cross-sales potential of the deal during due diligence. The sales team of the acquired company was stridently opposed to the implications of the cross-selling requirements; and further, customers were strongly aligned with their long-term sales reps and not inclined to be receptive to the buyer. Funny thing: revenue synergies (especially cross-sales) only work if customers buy your deal’s value-proposition!
Even when doing heavy consolidation and capacity reduction deals, achieving the cost synergies are usually just the starting line, not the finish line, of making your deal a success. For more information on the importance of avoiding these pitfalls, please see The Synergy Trap.