How Synergies Drive Successful Acquisitions
How Synergies Drive Successful Acquisitions
How Synergies Drive Successful Acquisitions
When applied to deals and valuation theory, synergy means both companies win.
The sellers shareholders receive an acquisition premium, and the buyer realizes
shareholder value by capturing synergies above what is required to justify the deal
premium. Because synergies are fundamentally the only tangible justification for
making an acquisition, sophisticated and repetitive buyers must orient their acquisition
processesfrom screening through post-integration monitoringto focus deal and
business unit teams on identifying, quantifying, executing, and tracking synergies by
deal, business unit, deal type, and across the portfolio of acquisitions.
We hope you will find this summary of our roundtable participants conversations
about synergies in the deal process informative and enlightening. We think it provides
a practical perspective to some of the challenges and potential solutions facing
corporate development professionals.
Our thanks to all who added to the dynamics of each roundtable by generously and
candidly sharing their valuable experiences and viewpoints. We are honored to be
able to host such discussions and appreciate the opportunity to learn from our clients
and friends.
Chart 1
Synergy calculations require multiple data sources, with the most critical inputs coming from target
discussions, analyzed diligence information, and other public data.
Typical
Typical inputs
inputsfor
forinitial
initialsynergy
synergycalculations
calculations
Analysis of target-provided
90%
information in due diligence
Note: Results represent the percentage of 10 survey participants that use the given input for their initial synergy calculations.
Respondents could select more than one input.
2
A challenge many companies face is the Its easy for the diligence team to get lost
way they approach diligence. Frequently, when theyre looking at everything instead
the diligence process revolves around a of concentrating on the things that can
dense series of checklists used to unearth potentially make or break the deal.
everything that could be wrong with the
target company. Rather than trying to cover
every possible variable or scenario, a more
efficient approach breaks down the key
value drivers and risk areas before diligence.
Synergy validation
Before synergies can be realized from an cost synergiesheadcount reduction,
acquisition, synergy assumptions must elimination of surplus facilities, reduced
be accurately identified then validated overhead, increased purchasing power
by the functional units responsible for are more quantifiable and easier to
hitting the targets. When functional identify and track. In contrast, revenue
units own the numbers and they are synergiesmarketing and selling
vetted by subject matter experts, the complementary product sets, cross-
accuracy of the synergy estimates selling into a new customer base or
increases. Panelists reported having more channel, access to new markets, reduced
success with core acquisitions, such competitiontend to involve a greater
as consolidating a competitor or closely number of variables and rely on more
adjacent entity. Synergies in these types subjective assessments to reach synergy
of core acquisitions typically are easier goals. Revenue synergies also depend
to model, integrate, and realize because highly on the behavior of third parties
the acquirer has a better understanding of including customers, resellers, and even
the business and already possesses the competitors, and thus present variables
systems and business process platforms that are challenging to model. Though
in which to consolidate redundant large revenue synergy targets sound
activities and drive alignment around theoretically achievable, they are rarely
customer and product strategies. fully met and generally require more time
and cost more than anticipated, according
Panelists also reported more successful to panelists. This increases scrutiny on
business combinations that relied on revenue growth acquisitions with fewer
cost synergies as opposed to revenue cost synergies.
synergies. One reason could be that
Weve had success in achieving synergies if the acquisition was closer to our
core rather than going too far away from the core. If you go too far away, we
typically discount all the synergies that the operating people put in the model.
3
Theres a certain type of acquisition that weve had a lot of success with,
and it follows that pattern where we are consolidating a competitor. There are
lots of cost synergies, and those are the things you can really count on. You
feel a lot more comfortable about the synergy projections. However, when
it comes to revenue synergies, weve missed so many. As a rule, we now
automatically discount them by 20 percent or more.
Negative synergies
Our panelists uniformly warned that deal captured can prevent a deal from meeting
modelers who exclude negative synergies expectations or, ultimately, cause a deal
often do so at their own peril. Though to crumble. Chart 2 shows the types of
most acquirers rely on a range of sources negative synergies panelists typically
when conducting synergy analysis, address and quantify in diligence.
negative synergies that are not accurately
Chart 2
Negative synergies
synergies typically
typically addressed
addressedand
andquantified
quantifiedpre-announcement
pre-announcement
Note: Results represent the percentage of 10 survey participants who address a certain type of negative synergy. Respondents could
select more than one type of negative synergy.
4
PwCs point of view
Inaccuracies in the identification and PwCs approach focuses on performing
validation of synergies often play a diligence on the drivers that have the
critical role when acquisitions fail to biggest impact on the valuation model
meet expectations. Leading practices to while mitigating risks. Though the
mitigate these issues address: availability of information is often limited
during the diligence phase, maintaining
1. Synergy identification a focus on key value drivers and risk
A significant number of companies use areas helps prioritize information requests
a siloed approach when conducting and management discussions. Absent
diligence. For example, corporate clear expectations to address synergies,
development works with bankers to diligence teams can become so distracted
determine synergies and valuation by deal killers and red flags that they
while finance and legal conduct a lose sight of the real objectives of the
comprehensive diligence review to identify transaction: create shareholder value
deal breakers. This approach can create through synergy realization.
inaccurate synergy estimates or cause the
diligence team to waste valuable time on
risks that are not relevant to the valuation
model. PwCs approach is to identify key
value drivers and risk areas at the start of
diligence. The diligence teams can then
programmatically focus on:
5
2. Synergy validation and accountability 3. Negative synergies
If companies do not validate synergies Negative synergies play a pivotal role
with the respective functional owners in many transactions, but despite the
during diligence, they face two major high financial cost of the negative
risks. First, inaccurate estimates are aspects of integrating an acquisition,
more likely to occur without validation these synergies often are overlooked
from functional owners, who are best and underestimated. Vetting the costs
positioned to assess: a) the cost savings associated with any estimated negative
or revenue growth potential; b) the synergies and incorporating these
investments required; and c) the timing numbers into the overall valuation are
and probability of successful synergy crucial to creating a realistic model. For
realization. Second, the risk of a post- example, the costs and potential financial
deal synergy shortfall increases without statement ramifications of converging two
validation because the actual teams companies revenue recognition policies
required to execute and deliver synergies can be significant because of complex
have no stake in the goals they are being accounting rules and varying business
asked to achieve. For instance, a product practices. Accurately capturing these
development team may be excited about types of negative synergies can help
acquiring a product, but the sales team companies avoid disaster by taking a deal
might not be aligned to reprioritize its off the table before they invest significant
efforts to meet the revenue synergies. amounts of time and resources.
It is critical to validate synergiesthe
single biggest drivers of deal value
and assign owners to drive post-deal
accountability before you sign the merger
agreement. This validation sets the stage
for accountability during execution. Clear
ownership and accountability for targets
are essential to achieve synergies.
6
Effectively realizing
synergiesExecution
With respect to targeting synergies, theres often a different perspective
as to whats achievable between the generals in the ivory tower and the
functional team leaders on the front lines in the actual integration. I find that
the corporate development team often plays that mediator role, trying to
figure out what is actually feasible.
7
When strategic initiativesincluding acquisitionsfail to fully realize their expected
outcomes, the most common reason is weak execution, not flawed strategy. On this
basis, companies should focus on ensuring the essential elements of successful
execution are in place. Otherwise, they jeopardize their ability to create shareholder
value through acquisitions.
Chart 3
Accountability for synergy targets typically is distributed between business unit leadership, functional
owners, and the integration leader.
Organizationalaccountability
Organizational accountabilityforfor synergies
synergies
Other 10%
Note: Results represent the percentage of 10 survey participants who assign accountability for synergy targets among business
unit leadership, functional groups, the integration leader, or another party. Participants could select more than one option.
8
Challenges for synergy realization
The strategic factors that play a role in Among our panelists, delayed integration
realizing synergies can vary depending on and underestimated integration
the type of synergies targeted. For cost complexity are the primary drivers
synergies, executive managements tone of unrealized synergies, followed by
and monitoring are crucial to securing overestimated synergies and a lack of
functional commitments. Transparency accountability (see chart 4). Also, most
and leadership assignment are keys panelists companies will permit changes
to achieving business combination to synergy estimates without adverse
synergies. Many revenue synergies consequences to compensation (see
rely on execution by the sales and chart 5).
product/engineering teams, which align
their efforts through a combination of
technologies that may then be sold
through new distribution channels. This
alignment may be more difficult to attain
on smaller transactions.
Chart 4
Most common
commonchallenges
challengesaffecting
affectingsynergy
synergy realization
realization
Note: Results represent which obstacles were chosen by the 10 survey respondents as possible challenges to realizing synergies. Respondents
could select more than one obstacle.
9
Chart 5
For surveyed panelists, the majority did allow synergy estimates to be revised without adverse
consequences in compensation or incentives.
12.5%
12.5%
75%
Never
Yes, between announcement and close
Yes, as needed/circumstances change
Talent retention
A significant amount of synergies are generally use financial incentives to
enabled through successful employee retain key personnel from one to three
retention. However, participants yearspostacquisition.
expressed issues with retaining talented
people. On average, companies
10
PwCs point of view
11
3. Synergy life cycle framework synergy models are substantiated by
During diligence, the synergies must be high-level plans that identify resourcing,
estimated and included in the valuation risks, and dependencies. The business
model. Post-announcement, a more cases should be prioritized to ensure the
detailed level of synergy planning is organization is not overwhelmed. The
required. PwC uses a synergy life cycle company should focus its resources and
framework that helps companies capture energy on the 20 percent of business
synergies through four phases: modeling; cases that drive 80 percent of the
business case development; detailed deals value. These cases must then be
project planning; and tracking. In the supported by detailed project plans and
business case development phase, resourced sufficiently.
12
Effectively realizing
synergiesTracking
We track actual operating income, actual revenue, and what they said
they were going to spend, and we see if that makes sense. If the operating
profit is good, then the numbers will work well. Typically, the first two years
performance is really strong because thats something that we have an
integration team for, but we really have a hard time tracking it beyond that.
The operating profit typically exceeds what we said we were going to do,
and the revenue typically lags a little bit behind. Usually, we never get the
sales synergies.
13
As seen through the eyes of participants
Synergies tracked generally include Synergies most frequently realized by
revenue, operating costs, and earnings panelists include cross-selling, headcount
before interest, taxes, depreciation, reduction, entry into new markets, and
and amortization (EBITDA). Comparing the elimination of redundant offices (see
these results with the deal model is chart 6). A number of panelists described
a common method used to evaluate a high degree of conservatism in modeling
the success of the transaction. Most revenue synergy targets because of
companies also track nonfinancial perceived risks and a lack of available
metrics such as employee and customer data prior to announcement.
retention, product release dates, and
integration milestones.
Our point of view is that revenue synergies are a very low probability. You
ought to spend the time to measure cost synergies discretely to estimate
them and track them. However, youre going to track them separately. The
negative synergies, youve just got to have your eyes wide open because
culture can cause a negative synergy.
Chart 6
Synergy realization
Synergy realization
Revenue growthcomplementary
100%
product sets/cross selling
Cost reductionhead count reduction 100%
Cost reductionreduced
38%
production overhead
Note: Results represent the percentage of eight survey respondents who reported realizing certain types of revenue or cost synergies.
14
PwCs point of view
15
Long story short
As the economy rebounds and the As leaders on their respective
credit crunch eases, acquisitions companies corporate development
will reemerge as a strategic tool teams, our panelists consistently
for generating shareholder value. expressed the importance of:
When buyers prospects of hitting
initial value expectations rise, deal 1. Recognizing potential synergies
timelines will shrink, placing a and incorporating them into the
greater emphasis on due diligence valuation process
and putting a higher premium 2. Transparency and accountability
on the teams conducting the throughout the execution phase
acquisition process. of an integration
3. Tracking synergies post-deal
to enable proper evaluation of
theacquisition
16
Key takeawaysInsights into synergies
Stronger balance sheets and an improved Assigning accountability for synergy
credit market often help pave the way planning, prioritizing value drivers, and
to strategic deal making. By effectively establishing clear roles throughout the
harvesting synergies, companies deal process are critical to success.
increase the chances of achieving
aggressive targets and creating The bottom line: Leveraging processes,
additional shareholder value. people, templates, and tools that
quickly and accurately capture and track
Establishing a scalable, robust playbook synergies is essential to an effective M&A
that rigorously assesses risks and process. By themselves, these factors
identifies value drivers is intrinsic to may not guarantee value creation, but
realizing synergies. Companies that apply without them a deal makers prospects
the same rigid, all-inclusive process to all for success diminish considerably.
deals, regardless of size or complexity,
may not be nimble enough to capitalize Again, we thank our roundtable participants
on their potential acquisitions. for sharing their experiences with us and,
through this summary, with you.
Though acquisitions outside a companys
core can be successful, experience shows
it is more difficult to realize synergies
and increase shareholder valuein
non-core deals.
17
About PricewaterhouseCoopers Transaction Services group
18 18
For a deeper conversation about capturing synergies in the acquisition process, please contact:
pwc.com
2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to
PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, the
2010 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, a Delaware limited
PricewaterhouseCoopers global network or other member firms of the network, each of which is a
liability partnership,
separate and or, as
independent legal the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which
entity.
is a separate and
*connectedthinking independent
is a trademark legal entity. ThisLLP.
of PricewaterhouseCoopers document is for general information purposes only, and should not be used as a substitute for
consultation
AT-09-0249
with professional advisors. LA-10-0327