Deal synergies – M&A opportunities for retailers
24 Jul 2017
Gabe Lengua of PKF O'Connor Davies explains the risks around deal synergies and how retailers can maximize the benefit from acquisitions
Consumer businesses have been a very active market for mergers and acquisitions in recent years and the potential for significant synergies tends to be high on the list of objectives.
Although determining and executing synergies are such critical parts of the process, many times things do not go as planned and the full potential of the deal is not realized.
We often hear years after a transaction is completed that it “didn’t turn out the way we thought.”
One reason for this is that the plan for realizing synergies wasn’t fully thought out and/or properly executed.
There are some basic elements of a well-defined, disciplined and transparent approach to synergies, each with their own challenges.
Things such as cost savings are easy to list and quantify but not so with negative synergies and these are often overlooked.
Some can be clear such as overlapping customers but others are not always so obvious. They include
- Negative effects of conforming accounting policies or practice differences
- Additional infrastructure or sales and marketing investments
- More generous employee benefits
- Revenue lost in competing channels
- Conflicting suppliers with more favorable pricing
At the execution phase, we see several drivers of unrealized synergies which can impact on time and costs, and need to be factored in to the model. They include
- Delays in implementing planned actions
- Integration costs/complexities were underestimated
- Potential synergies and cost savings were overestimated
- Lack of accountability for actions
- Culture and communication issues
Realizing synergies requires accurate and transparent reporting.
This can be done by setting synergy baseline targets and reporting frequently to senior management on execution progress.
Additionally, management’s tone and commitment to reaching targets such as holding delivery teams accountable and rewarding them for synergy realization, are critical to execution success.
While in some ways easier than modelling and executing, this is no less important.
Synergies tracked generally include revenue, gross profit, operating expenses and EBITDA.
Comparing these results with the deal model is a common method of evaluating the success of the transaction.
Most companies also track non-financial metrics including employee and customer retention, product release dates and integration milestones.
In many deals, we see good tracking early on (first year or two) but then a drop off, typically because integration teams are not kept together and/or the focus moves to another area. Also, revenue synergies (cross selling, accessing new markets etc.) tends to lag other synergies.
With a robust M&A market and sky-high multiples, identifying and realizing synergies has never been more critical.
Be sure to consider negative synergies, sensitize estimates and always disseminate and track accountability.
Leveraging processes, people, templates and tools that quickly capture and track synergies is essential to an effective M&A process.
While these things may not guarantee value creation but without them, a deal maker’s prospects for success diminish considerably.
For more details on the topic or for help in looking at the opportunities around deal synergies, contact Gabe at email@example.com