The false promise of synergy benefits is the reason why most M&A transactions result in buyer’s remorse. Before doing a deal, review AZ NGA’s ten-point checklist to determine the probability of success. Paul Barrett explains.
As a kid, I asked my dad to drive my sister and me to the end of a rainbow. “Dad, it’s over there,” I exclaimed. The longer he drove, the further it seemed. Eventually my dad’s narcolepsy got the better of him and he swerved into a roadside ditch; pot of gold nowhere in sight.
Thankfully, my sister directed us back home.
That sad but true story is a metaphor for many M&A transactions.
The journey begins with enthusiasm and excitement. Buyers spend a lot of money and energy pursuing cost savings, efficiencies and scale but ultimately fail to reach their target. Many end up at square one.
In M&A, the main cause of failure is poor integration resulting in unrealised synergy benefits1.
This article – the second in a three part series on understanding and unlocking synergy benefits – examines ten reasons why buyers systematically fail to achieve their stated synergy targets.
Based on an analysis of over 70 transactions completed by AZ NGA in the past five years, the single most critical success factor in M&A is home-base health.
That is because when a business participates in M&A, whether it’s a material acquisition, a tuck-in or a book buy, they are effectively creating a bigger version of the home-base. If they’re not operating efficiently and profitably, they often end up transferring their problems and inefficiencies to the target.
As discussed in my previous article, Don’t overpay for synergies, the earnings before interest and tax (EBIT) margin of the home-base dictates the EBIT margin of the combined entity, therefore, based on our analysis, buyers paying 2.5 times for a client book in the current market are likely overpaying unless their EBIT margin in greater than 35%.
If you’re banking on synergy benefits to make an acquisition business case stack up, use the following list to objectively assess the likelihood of realising synergies.
10 reasons why M&A fails to deliver synergy benefits:-
Like the mythical pot of gold under the rainbow, synergies continue to evade even the most enthusiastic treasure hunters. That said, unlike chasing leprechauns, the pursuit of synergies is still a worthy cause.
My final column in this series will differentiate between mergers and acquisitions, and question whether integration is necessary at all. Assuming that it is, it will look at winning strategies for extracting synergy benefits. I will share what an ‘ideal’ target looks like.
Read more of Paul Barrett’s articles in Professional Planner.