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Why synergy matters
Synergy is such a significant factor in M&A that it’s often the leading motive for corporate acquirers.
As corporate buyers and private-equity firms consider acquisitions with the purpose of combining operations, synergy becomes a driving factor for their acquisition decisions and target selections.
However, when it comes to managing synergies, the leadership team of the combined entities often fail to plan ahead, rationalize business cases, and track value creation.
Whether the purpose of the M&A transaction is to leverage scale to expand the market footprint or to access and create new innovations and products, top-down synergy planning is critical for all acquirers – starting well before the dealmaking is done.
Even more importantly, companies need to develop rigorous integration plans and establish a robust governance model to ensure not only that all targeted synergies are captured, but also that value creation is tracked and reported.
Based on our years of experience with mergers and acquisitions across a variety of industries and geographies, we recommend five leading practices that can help companies attain deal synergies.
Oftentimes, about 80% of synergies will come from 20% of synergy drivers.
1. Focus on the first six months, which are critical to develop a synergy capture framework.
The acquirer’s management team needs to have a clear vision for the future state of the combined company. This should include developing an integration framework that helps identify the “right” integration. The Integration Management Office (IMO) plays a critical role during the first six months to set the vision, guidelines, and framework.
Every deal is unique, of course. But based on the transaction, the acquirer must first determine the appropriate degree of integration: full, vertical, horizontal, or autonomous.
Within the first six months after the deal closes, management must consider establishing clear end-state goals for all business functions, operations, and technology areas, as well as a concrete plan for achieving the goals. This will help optimize the combined organization’s operating costs and achieve its revenue growth objectives, which ultimately will drive higher synergies.
Capture quick wins
2. Develop a rigorous plan to manage synergies and capture quick wins.
Because business and technology ecosystems are evolving at a fast pace, acquirers should apply the “80/20 rule” as they plan their first 12 to 18 months of activities. Oftentimes, a significant amount of synergy will come from a few key synergy drivers.
Quick wins in operational synergies typically include but are not limited to:
Reduction in office space
Rationalization of contracts, professional services, and supplier agreements
Reduction of headcount
To limit the duration of integration, companies should set up and execute against a rigorous integration plan. This allows the organizations to avoid prolonged integration, which drives up one-time integration costs and creates negative synergies.
Derive insights from data
3. Consider a data-driven approach, which can provide actionable insights and untap innovative synergy opportunities.
Many companies leverage complex financial models to track realized synergies. This helps them ensure that they are meeting the pre-set synergy targets.
IMOs should consider leveraging data analytics to gain greater insight into the value and timing of realized synergies. The timing of synergy realization plays a significant role in the overall synergy management process. Understanding the implication of when the synergies are realized can help integration teams untap innovative synergy opportunities, as well as better gauge and manage the overall health and progress of the integration.
Additionally, through insights derived from data analytics, IMOs could challenge the assumptions made by the management team before the deal closed, to redefine and evolve the NewCo’s business performance metrics.
Measure and validate
4. Treat synergy reporting as an essential component of synergy management – one that requires continuous monitoring on results with rigorous reporting mechanisms.
Measuring and reporting synergy capture and value creation is a long-term continuous exercise that involves a more frequent cadence during the first 12 to 18 months post-deal close. By leveraging an integrated business performance dashboard, IMOs can provide customized reporting for the C-suite and each of the execution leaders.
Accurate measurement and validation of synergy realization is crucial, so that the management team can identify roadblocks throughout the integration and ensure the KPIs for the acquisition’s success are realized.
Establish robust governance
5. Develop robust governance to capture and manage synergies .
Successful acquirers assign dedicated resources to manage synergy captures, and they also involve the executive management team to provide oversight and governance throughout the entire process.
Best-in-class synergy tracking and management is a responsibility shared by the IMO, which provides cross-functional oversight, and the Financial Planning and Analysis (FP&A) team, which provides the financial insights.
With such governance in place, as the integration progresses, the team can identify and mitigate earlier any risk of not meeting synergy targets or incurring negative synergies with appropriate contingency plans.
Synergy “slippage” is more likely to occur as the complexity of the integration increases. For example, this might occur when a highly customized operating model for the NewCo is sought or when clashes emerge between the two combining cultures.
What comes next
Synergy management is a collaborative effort between the combined company’s leadership team and the integration team.
Our experiences have taught us that many unforeseen events could impact synergy realization. Therefore, it is imperative for acquirers to consider these five best practices when it comes to manage integration synergies. By establishing a robust plan early on to capture quick wins and applying strict disciplines to continuously measure, validate and report on synergy results, combined companies can meet or exceed synergy targets.