Every buyer wants (and needs) significant synergies from an acquisition, especially when high multiples are being paid for target companies. In particular, buyers look for ongoing reductions in overhead and other operational costs. They also want higher revenues as a result of the newly acquired customer base, jointly developed new products, or better price realization.
But, unfortunately, CFOs can’t count on these synergies to just happen. As the Boston Consulting Group points out in its recent report, “Six Essentials for Achieving Post-Merger Synergies,” acquirers have to follow a “disciplined, pragmatic approach to pursuing merger synergies, from identifying and validating them to creating detailed plans with built-in accountability.”
In the report, we found four items especially critical to capturing synergies:
1. Tightly link due diligence and post-merger integration. It’s common, BCG points out, for a merger due-diligence team’s scenarios “to unearth 20% or more in cost savings based on assumptions about consolidation, or to estimate more than 10% in additional revenues based on industry benchmarks or high-level assumptions about market or customer segment share.”
Business unit heads, however, typically have no input into the targets and no say in whether they are feasible. BCG says companies need to ensure a “well-coordinated handoff” between the due diligence team and the integrated planning team. Going further, some buyers put due diligence team members on the post-merger integration team. Others assign functional managers, like the heads of sales and HR, to the due diligence team. On that team, their role would be to “help assess synergies function by function,” to identify the levers with which to achieve them, and to sign off on the synergy targets.
2. Make the most of “clean teams.” Many companies, aware of restrictions on sharing sensitive data prior to a deal’s regulatory approval or close, wait before refining synergy and integration planning. “Clean teams can be an effective sway for companies to accelerate post-merger integration planning,” says BCG in its report. What’s a clean team?
A clean team is “an independent group that, with management’s guidance, collects and analyzes sensitive company data before the close.” Members of the team “can be third
3. Pursue revenue synergies as diligently as cost synergies. According to BCG, “companies plan and track revenue synergies with less rigor and transparency,” for two reasons: “they are harder to track, and leaders view revenue synergies more as part of their day-to-day business than as a distinct exercise.” As one finance chief told CFO years ago, “I don’t like to assume any revenue growth” as a result of a takeover. But rigor can be achieved.
The first step in planning and tracking revenue synergies is to define the term. BCG defines them as “the gap between the additional revenues earned as a result of the merger and [the] baseline revenues — those the company would expect to earn had the merger never taken place.”
Revenue synergies tend to come from products and services cross-sold from one company to the customers of the other; new products or services jointly developed by the combined companies; and what BCG calls “price and product-line optimization.”
The baseline revenues (pre-merger) need to be defined during the merger integration planning phase, and the integration team’s job is to identify potential synergies and the “concrete initiatives” for achieving them. But it’s up to sales leaders “to develop initiatives and a sales process that will ensure that synergies are captured in a systematic and disciplined way,” says BCG. This is accomplished through training on new products and customers, sales lead generation, elimination of overlap in account assignments, and new incentive systems.
4. Track performance throughout the post-merger integration. Among the most common post-merger oversights, says BCG, is failing to systematically monitor progress against achieving synergies. “When they see they are hitting their targets, companies know not only that the merger is succeeding, but that their assumptions were on point,” says BCG. Performance tracking also gives companies a way to “communicate post-merger progress objectively to the market.” To track performance, the integration team needs to “create roadmaps and milestones for each integration project, determine synergy timing by project, map interdependencies and risks, and develop KPIs to ensure steady progress,” says BCG.
Finally, BCG says, all synergies should be monitored on a monthly basis for the first 24 months “to allow for swift recovery if a project veers off track.” After that, quarterly tracking is sufficient, but it should be done “until the last dollar of synergies is captured.”