Capturing the synergies that deliver the business case for an M&A event is the most important responsibility of an IMO (Integration Management Office) leader.
Since most M&A transactions have synergy goals, this article will focus on some of the most common challenges inherent in synergy capture, and some solutions that should manifest in any post-acquisition integration plan. The insights and recommendations in this article are drawn from Global PMI Partners’ experience managing over 325 M&A transactions for Private Equity and Corporate entities.
“missing synergy targets that are the underpinning of the financial business case is simply not an option”
For these clients, missing synergy targets that are the underpinning of the financial business case is simply not an option, so a robust Synergy Program Management (SPM) approach is always a key foundational element of our integration strategy & framework.
The following are a few common assumptions, along with some realities and implications, for post-acquisition integration planning:
“The targets in the press release should be no problem”
- Assumption: The synergy targets communicated in the press release are on the aggressive end of the synergy goal range.
- Reality: Most CEOs communicate a target that is on the low end of the range.
- Planning implications: Targets will need to exceed the communicated range by a significant amount to ensure achievement of the communicated goals. As the old saying goes, “your reach should exceed your grasp”.
“No further analysis required”
- Assumption: The targets have been vetted and verified by subject matter experts.
- Reality: Some may have, but often others are a target derived from assumptions and the best available information at hand. It is often impossible to include SME’s in the verification process during the sensitive pre-announcement phase.
- Planning Implications: Include time for SME’s to help verify assumptions, target amounts, and realization timeframes post close.
“We are going to track synergy initiatives separately”
- Assumption: Synergy initiatives are sometimes separate from integration initiatives.
- Reality: They should not be, as all synergy efforts are related to integration and thus should be tracked and managed as part of the overall post-merger program.
- Planning Implications: Make sure synergy initiatives are specific, assigned out to the functional leads tasked with integration, and are measurable and trackable. Synergy initiatives that live “off the grid” are seldom tracked appropriately, and thus rarely realized in full.
“We may be able to complete some things sooner than expected”
- Assumption: Synergy realization timeframes can be accelerated vs. what is in the business case.
- Reality: Based on many of the issues outlined above, the realization timeframe can often extend beyond the original timeframe.
- Planning Implications: Accelerate the validation phase to confirm targets and get the synergy capture initiatives underway.
“Headcount synergies should be realized as soon as possible”
- Assumption: Synergies related to headcount reductions are solidly quantified and thus should be expedited as soon as possible.
- Reality: Many dynamics can impact the headcount reduction exercise, and it may be impossible to sever people as planned due to bandwidth issues, legal issues and a host of other mitigating circumstances.
- Planning Implications: Include a headcount tracker (also called LDW-Last Day Worked) worksheet along with your synergy tracking reporting to keep tabs on separation timing. Strive to hold to the original schedule but get ahead of issues which may cause delays and factor them into your integration planning early.
Other common synergy realization pitfalls
Based on our experience, these situational dynamics can impact an integration leader’s ability to deliver the synergy targets:
- Sometimes targets can be in a rather general category, and thus have no single and accountable owner.
- An example of this is “product rationalization synergies”, where a number derived from some product line rationalizes assumptions. The problem is this typically involved teams from product, marketing, sales, finance and other functions who each may have some initiatives involved with such an effort.
- When big goals aren’t broken down into specific initiatives, each with an accountable owner, they tend to live only in decks and never manifest fully in measurable and trackable integration plans.
“Difficulty in Actuals Tracking”
- The tracking of actuals can be complicated by insufficient reporting capabilities, legacy system limitations, or bandwidth factors.
- Agreeing on reporting sources and methods early on is critical to being able to accurately validate and report synergies.
“Clear ground rules for revenue synergies”
- It is helpful to get guidance on what can and can’t be counted as a synergy. This distinction can be most needed when you have cross-selling synergies and must estimate what percent of lift is attributable to the M&A event vs what is “organic” (would have occurred anyway).
- Getting these ground rules in place early will avoid disagreements later on what can be counted as a synergy. In most cases a conservative approach works best, as cross-selling synergies are typically one of the more challenging categories to manage and track.
“Tracking & Reporting Responsibility”
- The responsibility for tracking and reporting on synergies can sometimes be part of the IMO’s responsibility, or it can live in Finance. If it’s part of the IMO’s scope, it is advised to include a finance person on the IMO team so there is visibility into the integration workplans and reporting.
- If it lives “outside the IMO” and is part of the acquiring organization’s finance department’s responsibilities, make sure there is adequate linkage to the IMO so that risks and issues related to synergy capture are transparent and actionable.
Effective synergy program management is one of the more challenging aspects of any post-acquisition integration project. It is made more difficult at times by the fact that a lot of early synergy work is completed by a small group of executives, who are “in the know”, then communicated at close with the expectation that they are achievable as laid out, with no complications.
That is seldom the case.
Synergy targets can be inflated, be based on key assumptions that have changed, and have realization timeframes that are unrealistic. All these issues need to be managed out via a robust synergy program management approach that addresses these issues early in the integration process. A good synergy program management approach can also enable the discovery of opportunistic synergies, which can help offset any potential “misses”.
Establishing synergy program management as a foundational element of your integration approach will help management teams prioritize critical deliverables, so that they may deliver on the investment thesis.
Scott Whitaker is a Partner at Global PMI Partners, an M&A integration consulting firm that helps mid-market companies around the world bring their operational, technical and cultural differences into alignment. He is also the author of Cross-Border Mergers and Acquisitions (2016) and Mergers & Acquisitions Integration Handbook, (2012).