Wave of M&A means companies could add nearly US $2 trillion of value, if they capture all the announced synergies successfully
1 December 2015
- The worldwide corporate sector has announced $4.9 trillion of deals since January 2014
- Deloitte estimates the announced annualised cost synergies to be around 3-4% of the deal value
- Driving successful integration is therefore likely to be high on the board agenda
Business leaders have promised annualised cost synergies that amount to around 3-4% of the total deal value globally, according to analysis by Deloitte of publically announced annual synergies. If they succeed, they would be able to add $1.5-$1.9 trillion, which is between 10-13% of the future value of the firm, before deducting premium and integration costs.
Deloitte experts also suggests that the cost of fully implementing these transactions is likely to be around $200-250 billion, to pay for merging the businesses and their IT systems, redundancy costs and rebranding. The most common benefits that cover the cost of this premium are reduced overhead and operating costs, improved purchasing power and better use of assets.
Angus Knowles-Cutler, vice-chairman at Deloitte, said: “The headlines tend to dry up once the deal is announced, but with $2 trillion dollars at stake, for management teams the hard work starts once the contract is signed. In fact, publically announced synergies are often lower than what management privately expect and this figure will be a conservative estimate for the synergies that are ultimately delivered.”
Certain sectors have committed to higher than average integration synergies, with manufacturing leading the way with annual synergies of 4-4.5%. Consumer business and technology and telecoms buyers are also committing to higher than average synergies.
Knowles-Cutler added: “Many business integrations go very well, and often deliver more value than originally expected, but others struggle and fail. However, one of our related studies based on a survey of FTSE 100 chairmen and analysts from major investment banks, found that limited significance is given to the risk of a failed integration before the deal is signed. Most respondents also felt that there are too few formal, well-articulated standards for reporting on synergies and integration progress, but acknowledged more regular review is necessary.
“The most common risks to a successful integration are a lack of decisive leadership, organisational confusion, and disruption to business due to loss of customers and key staff. To avoid this, successful mergers need to be led by managers experienced in the challenge, they need to be well organised with clear milestones and reporting; and people in the businesses need to be treated with respect and honesty. As M&A deal values climb, driving successful integration is likely to be high on the board agenda for many months to come.”
Notes to editors
To calculate the potential future value of the synergies, Deloitte collated global M&A data from 1 January 2014 onwards. The future valuation of these synergies was calculated based on forecasting assumptions (e.g. savings sustained in future periods) and used a number of different valuation techniques (including discounting of future cash flows) to generate the range stated. Our analysis focused on the potential savings that could be achieved (based on amounts announced by the acquirers) and was not an evaluation of the likelihood of these saving being realised.
The survey of FTSE 100 chairmen and analysts from major investment banks can be found here.
The data on cost synergies will appear in the forthcoming M&A Index from Deloitte.
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.
Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
The information contained in this press release is correct at the time of going to press.
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