M&A Can Succeed If Acquirers Limit the Seller’s Share of Synergies

Shareholders Welcome Details About M&A Deals, Rewarding Acquirers for Disclosing Strategy and Synergy Expectations, According to New Research from The Boston Consulting Group and Technische Universität München

Munich - Companies that engage in mergers and acquisitions often justify the deals by pointing to the potential synergies that transactions will unlock. But those acquirers also know how much of the synergies they can afford to award the seller in the form of a transaction price premium. Research shows that successful acquirers share only about one-third of the annual capitalized value of synergies with sellers, according to a new report by The Boston Consulting Group (BCG) and Technische Universität München (TUM). The report, titled Divide and Conquer, How Successful Acquirers Split the Synergies, is being released today.

The report details the empirically based methodology that BCG and TUM have developed to help companies quantify the value of synergies in comparison with the takeover premium that the acquirer offers to pay. By expressing the price in terms of anticipated synergies, acquirers and investors can determine whether a price that motivates the target’s shareholders to sell also has the potential to reward the acquirer’s shareholders with a value-creating transaction.

In addition, the report quantifies the value that acquirers can create by communicating deal strategy and disclosing the value of synergies. “When evaluating a deal’s upside, shareholders appreciate details about the acquirer’s strategic and financial M&A rationale, and they reward communicative acquirers with higher-than-expected valuations in the period after a deal is announced,” said Dr. Jens Kengelbach, a BCG partner and coauthor of the report.

Synergy Potential Varies Widely By Country and Industry

The value of synergies fluctuates widely even among companies in the same industry. An analysis of large deals in the oil and gas sector from 2001 through 2011, for example, shows that the value of synergies ranged from 5.8 percent to 0.2 percent of the target company’s annual sales. What’s more, some industries, particularly those such as transportation, telecommunications, and utilities, offer little room for value creation through synergies, even though they are “natural monopolies” that in theory have high synergy potential. Companies in these industries are usually subject to extensive oversight by national regulators that bar them from realizing all available savings. Industries with a high level of ongoing international consolidation, on the other hand, can generate significant synergies. BCG and TUM find that the median synergies that such companies can generate are equal to 4.8 percent of the target company’s overall sales and 1.5 percent of the combined company’s annual sales.

As general rule, acquirers that disclose synergies when announcing a deal will focus primarily on cost synergies, which acquirers can reliably realize through their own efforts. By contrast, revenue synergies are more difficult to quantify and realize, depending as they do on the behavior of customers and other third parties. “Investors therefore tend to be skeptical of acquirers that price in revenue synergies,” said Dr. Kengelbach. “They believe those synergies only after they are realized.”

Best Practices Can Help Deals Succeed

BCG has identified the best practices for setting synergy expectations at the time a deal is announced and for tracking progress against synergy targets. These best practices include the following:

• Providing a context for the current deal by referring back to earlier transactions to demonstrate that each new deal is premised on sound, consistent strategic logic.
• Explaining in detail the strategic and financial rationale for the current deal in the form of a narrative that takes into account current macroeconomic conditions, industry fundamentals, and the competitive positions and differentiating strengths of both acquirer and target.
• Disclosing the value and sources of anticipated synergies and providing—and regularly updating—a timetable for meeting and possibly exceeding their synergy estimates.