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How to harvest synergies in cross-border take-overs

 

By Global PMI Partners


When you take over another company or merge your company with another, you want the new entity to be worth more than the sum of the two parts—1+1=3. Synergies are crucial, but what synergies exist? How do you look for them and how do you manage them?

 

The value of an acquisition consists of two parts: the stand-alone value and the synergies. The stand-alone value is what can be expected from the target under the present scenario. The synergy is what comes on top, thanks to an improved strategy. Those synergies will normally be different if the acquirer is a private equity company, compared to a corporate acquirer. The calculated/estimated value of the synergies is an important factor in the determination of the bid price.

When talking about synergies in the case of a cross-border deal, it’s especially important to have a clear understanding of things: the business model of the target and how it’s measured, the influence of unions and work councils, the interference of laws and taxes, etc. This requires time, before and after close, and a lot of communication.

Which synergies?

Synergies can be divided in different categories:

revenue synergies: cross-selling new products or selling them in new markets. This is difficult to quantify, as reactions are difficult to predict, but on the other hand it’s often an essential part of the reasons for the acquisition.
cost and balance sheet synergies: e.g., employee redundancies or resource rationalization. This can take time and is often met with resistance.
procurement synergies: a larger company has a higher negotiating power than two smaller companies, so the merged company can negotiate lower prices from suppliers
tax synergies: the operating losses of the target can be carried forward or used to reduce tax liabilities of the acquirer.

The way to deal with those different types of synergies is different. You want revenue synergies to be as high as possible, so you will push your sales team in that direction. On cost synergies, being careful is necessary: use clear criteria, explain, communicate.

Of course, you also have to watch out for negative synergies: competition authorities can ask for remedies, cultural clashes, necessary investments in back office systems, negative reactions from customers.

Another way to classify synergies is the difference between complementary and overlapping synergies. A complementary synergy would be a new geographical market. This is, of course, welcome. An overlapping synergy is more difficult to manage. When you merge two competitors on the same market, what will be the remaining activity? Synergy tracking translates ideas to actions, accountability, and results

Synergy tracking translates ideas to actions, accountability, and results

Synergies are not much more than educated guesses until a manager takes responsibility, resources are attributed, budget plans are written, and the incentives to get the work done are in place. In short, you need a synergy program.

Who will govern the program, who will have oversight of the synergy program? Will somebody lead the synergy work stream, and manage the synergy program? How broadly will they be communicated, who needs to know the names of the people responsible and their targets? Who are the owners of the targets, at what levels in the company are targets assigned? What is low-hanging fruit, and what needs more time and focus?

An effective synergy tracking process answers all of these questions and enables you to monitor the actual impact and synergy realization, often directly to the bottom line.

Post-close, there are critical actions to be undertaken to really implement the synergy program and so to capture the synergies. Those actions will differ according to the situation, but engagement at all levels of leadership is certainly important. The ‘owners of the targets’ will run into all kinds of issues, and a procedure should make sure all leadership gets involved. Even with daily focus on synergy realization, companies can still expect full synergy capture to take 2-3 years.

Follow-up

It’s a good idea to have a ‘post-closing due diligence workshop’ some 2 to 4 months after close. The leadership of both acquirer and target should participate and look back and forward. How do we look at the original M&A strategy today? What lessons may be learned from the due diligence reports? What was the business case and what are the results thus far? What remains to be done, and what risks are still at play? How did we handle integration and where is change due?

Also in a next stage, 6 to 12 months after close, a review is necessary. What synergies haven’t been captured yet, what new synergies did pop up? The original synergies should be harvested by now, let’s explore what else there is. Look at the merger/acquisition in an innovative way.

A comparison between the practices of the different parts of a merger is also a useful exercise by then. Both ‘old companies’ now know one another and are able to look for good practices. How does the other one work and is this better? Should we change our KPI’s?

 

 

Global PMI Partners, an M&A integration consulting firm that helps mid-market companies around the world by delivering exceptional consistency, speed, and customized execution on the complex operational, technical and cultural issues that are so critical to M&A success.

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