One consequence of the new alignments of Business 4.0™ is that CEOs are increasingly looking at mergers and acquisitions (M&A), as well as divestitures, to transform their businesses to sustain growth and profitability for the long term. When undertaking M&A, 80% of CEOs say their main financial consideration is, by far, maximizing synergies. But for almost half of CEOs, synergy management is the most difficult part of the M&A life cycle.
Ensuring Synergy Realization
‘Synergies’ are the increase in the shareholder value of the merged firm over that of the two separate firms combined. Driven by targeted improvements in revenue, cost, and working capital, M&A synergies committed by CEOs to the market for their transactions too often are over-estimated or improperly planned for realization. Five leading practices if employed by CEOs ensure attainment of the deal synergies they seek through M&A, preventing dampening of shareholder value.
Right-fit Integration: Whether acquiring new products, services, or business capabilities, entering new markets or industries, creating new business models, or maximizing economies of scale and scope, adept CEOs firstly direct the C-suite to develop the ‘right fit’ integration strategy relative to the target operating model (TOM) and business performance expectations. Full integration or ‘absorption’ of the acquired company is not necessarily required to take control of the assets purchased to unlock the synergies expected. ‘Best of Breed’, ‘Transformation’, or ‘Preservation’ strategies may provide a better fit -- and therefore control -- before more disruptive forces prevail.
Truncated Synergy Realization: Secondly, leading practice CEOs guide their C-suite to apply the ‘80/20 rule’ in developing the integration plan with the goal of capturing most of the targeted synergies within 18 months after a transaction’s close. Roughly 20 percent of run-rate synergies should be realized on Day 1 , followed by additional 40 percent in the next 12 months and 20 percent in months 13 to 18.
Analytics-driven Planning: CEOs who have mastered M&A are not afraid to dive deep into the data leveraging analytics and best practice business performance metrics to uncover or test assumptions and more accurately estimate synergies. For example, understanding changes in consumer buying behavior by looking at variations in buying cycle completion rates can indicate a willingness to engage with new offerings. Further, insights into demand can help focus integration efforts on those products and services that will retain existing customers and drive new growth.
Integrated Governance: In keeping with ‘you can’t manage what you can’t measure’, the C-suite and their integration execution leaders under the CEO’s leadership employ a robust governance structure and integrated performance dashboard to optimize business outcomes. M&A governance entails clear roles and responsibilities, early and comprehensive risk identification, and detailed work plans, including those for contingencies.
Persistent Measurement: The dashboard is used for continuous reporting of performance to all key stakeholders, enabling as needed more rapid changes to plans and resources. Comprised of both leading and lagging KPIs, the dashboard ensures agreed milestones and timelines are met and helps isolate both success and hindrance factors, such as too often overlooked culture, to achieving synergy goals.
Gearing for Today’s M&A
Gone are the days of multi-year, post-merger integrations and transformations to realize targeted synergies. In the era of digital disruption combined with recent slowing in growth globally, CEOs must pursue M&As and transform at the same time -- and with greater speed and efficiency. Effectively leveraging the five leading practices of Right-fit Integration, Truncated Synergy Realization, Analytics-driven Planning, Persistent Measurement, and Integrated Governance will serve CEOs and their executive colleagues well in increasing shareholder value through M&A.