Five value creation principles for your next M&A transaction

Successful acquirers tend to set internal value creation targets that are more ambitious than the external goals they publicly announce. Successful companies in our database (defined as acquirers that met or exceeded their announced synergy goals) achieved, on average, 1.3 times the synergies they announced to Wall Street and to investors. They did this by setting even higher internal targets, the most successful of them in the range of 1.5 times to 2.0 times their externally announced synergy goals. We recognize that many companies understand the value of aggressive internal targets, but we also see how this principle, when folded into corporate financial planning and executed rigorously, can reliably boost value creation.

In Deloitte’s 2020 M&A trends survey, a third of respondents cited not achieving revenue synergies and expected sales not materializing as reasons their M&A deals failed to generate expected value. Acquirers that apply the same (or a greater) level of rigor and commitment to planning revenue synergies as they do cost synergies often achieve far greater success against their revenue synergy goals. In our database, buyers that internally tracked revenue synergies exceeded their targets by 23 percent on average, while those that went a step further and externally announced revenue synergy goals achieved even better outcomes. On the other hand, buyers that had revenue synergies as part of their deal thesis but chose not to internally commit to them barely reached their targets.

Leaders face inherent challenges when they commit to revenue synergies. These sources of value are difficult to accurately identify and quantify, and they may be hard to realize. A multitude of factors such as market conditions, customer reactions, macroeconomic changes, and internal issues around execution— all can potentially hamper capturing revenue synergies. It’s no surprise that acquirers’ revenue synergy claims are often discounted, at least over the short term. Concurrently, underachieving publicly committed targets can have impacts on valuation or on the Board’s confidence in M&A.

Still, despite the challenges in managing expectations, revenue synergy goals should be a key component of the deal thesis and out in the open to create a level of commitment among management and integration teams. Unambiguous announced targets help foster better governance and accountability to achieve potential revenue goals. Teams become more likely to work together creatively to address customer needs effectively and apply greater rigor to quantifying the opportunities.

Reducing headcount is seldom a silver bullet for value creation. Although labor expense is usually a large item on the income statement and thereby a tempting target, headcount reduction shouldn’t be the biggest source of deal synergies. Successful acquirers from our database do a better job expanding sources of non-headcount savings such that the proportion of headcount synergies isn’t the largest driver of value. Further, in deals with an important focus on growth or strategic investments, people are usually valuable assets, often with the ability to redeploy to drive new initiatives.

In our database, as a proportion of total identified synergies, successful acquirers had non-headcount synergies of 63 percent, considerably higher than the 53 percent of unsuccessful acquirers. Successful acquirers in most cases identified higher cost synergies from non-headcount sources such as logistics and distribution efficiencies, rationalization of R&D efforts and development of new operating models.

Typically, acquirers make bold upfront investments to execute and integrate M&A transactions, with the funds focused on reaching an agreement and realizing anticipated synergies. The kind of new and aggressive projects that can create value in a combined organization demand support. Timely investments for the retention of key talent can help make the integration successful and promote business continuity. Spending on IT system improvements or network optimization can help as well. There may be product development costs that are key to specific revenue synergies. Carving out funding for transformative changes in the manufacturing footprint may be appropriate. Whatever the need for the capital, it needs to be injected in a timely manner, typically early in the process to help create momentum.

Usually, we hear integration costs quoted as a percentage of target revenue. In our database, we measure integration costs against the associated value they are meant to create. A majority of acquirers invest between 0.5 times and 1.5 times anticipated run-rate cost synergies on one-time integration costs. Acquirers making larger deals can find themselves in the bottom half of the range largely due to the fixed nature of transaction costs. Acquirers without dedicated integration capabilities or those making transformative acquisitions are often at the higher end of the range.

Synergy overachievers reach their announced value creation targets within the first 24 months after a deal closes. And the momentum to capture synergies fades away almost completely within 36 months. All the successful organizations in our database had dedicated cross-functional synergy teams that were able to quickly identify projects and build momentum.

Successful acquirers achieved almost half of their run-rate synergies in the first year, according to our database, and 98 percent in year three.