By Jyoti Prakash Gadia
Mergers and Acquisitions (M&A) can often feel chaotic and unpredictable, with deals appearing out of nowhere, demanding immediate attention. When the perfect target finally appears in the crosshairs, it’s easy to catch “deal fever,” where excitement blindsides critical judgement, leading to rushed decisions and overlooked risks.
Multiple surveys and analyses reveal that acquisitions fail more frequently due to misguided M&A strategies and poor post-merger integration rather than high purchase prices or insufficient due diligence. Without a clear plan, companies can veer off course, pursuing deals that don’t align with their overarching goals, and failing to integrate new acquisitions smoothly.
Synergies are the cornerstone of value creation in M&A, turning otherwise unappealing targets into potential opportunities. They give corporate buyers a significant edge over financial sponsors in competitive bidding wars. However, spotting potential synergies is just the beginning; the real challenge lies in capturing and realising them. The true value of synergies can evaporate if buyers end up passing them on to sellers through inflated purchase prices. Both cost and revenue synergy present varied challenges and require an in-depth analysis and multifaceted approach to mitigate them.
Acquirers frequently make bold claims about potential synergies that ultimately go unrealized. This “sum the synergies” approach is flawed because it fails to reliably predict future value. Historical M&A data indicates that these promised synergies often do not materialise.
Identifying undervalued assets is essential for creating value through acquisitions. However, in competitive bidding scenarios, the winning bid often surpasses the asset’s incremental value, leaving the acquirer with minimal retained value. The competitive nature leads to the winner paying a price that allows for little value retention. Research over the past 15 years indicates that buyers in public M&A deals typically retain only about 50% of the identified synergies, with the rest being absorbed into the purchase price—a figure that fluctuates with market conditions. The failure to achieve or capitalise on synergies is often cited as a leading cause of M&A failures. Even with a sound theory, the actual implementation of integrating two companies’ assets can be challenging. The assumption that combined assets will naturally produce significant value often leads to disappointment if the integration process is not managed effectively.
Achieving cost synergies involves tough decisions such as layoffs, facility closures, and process modifications. These measures, while essential for cost savings, can lead to employee resistance and morale issues. Furthermore, the expected cost savings may not be immediate due to the time required for the integration of systems and processes. Achieving revenue synergies poses another substantial challenge, necessitating the flawless integration of varying cultures, processes, and systems. These synergies often take time to materialise, as efforts to develop new products, enter new markets, and build brand awareness require meticulous strong execution.
Likewise, integration costs are a critical factor, requiring substantial investment in IT systems, staff training, and process adjustments. Poor management of these expenses can erode the expected benefits of a merger or acquisition. The success of M&A depends heavily on the acquirer’s ability to synergize its distinctive assets with those of the target company, generating value that is often difficult to predict. A sound alignment is rare and often a tough nut to crack, contributing to the high failure rate of M&A transactions.
To really get the most out of these synergies, you need to hit the ground running and start focusing on capturing them as soon as the deal is signed. This means bringing in a clean team of third-party experts between signing and closing to handle the exchange of sensitive data essential for refining those synergy estimates. The real test is in the execution—turning those theoretical synergies into real savings and growth demands a no-nonsense approach to post-merger integration.
The success of an acquisition fundamentally depends on its alignment with the acquirer’s corporate strategy, which involves strategic foresight, rigorous analysis, and effective integration. Anticipating future trends requires forecasting technological innovations, market dynamics, and demand fluctuations to identify distinct value opportunities. Conducting a thorough analysis involves a profound comprehension of the acquirer’s unique assets and strengths, enabling a meticulous assessment of complementary resources. Harmonising assets requires formulating strategies to integrate the acquirer’s capabilities with those of the target company, thereby creating enhanced synergistic value.
(Jyoti Prakash Gadia is the Managing Director at Resurgent India)
(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)
From: financialexpress
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