Managing "Synergy-Dependent" Deals

Historic data claims that mergers hold great promise, but rarely meet expectations. In reading the statistics published by research firms and endorsed by a variety of consulting companies, successful mergers are so rare that only 17% of all transactions achieve the expectations set by management at announcement.  These statistics say half haven’t even earned the cost of capital and therefore would have destroyed shareholder value. If that’s correct, the majority never created shareholder value.

I’m not sure we know where all these statistics come from.  Surely, we can collect much evidence from the publicly held deals.  But what about the privates?  What CEO is going to announce to the world, “I didn’t deliver what I promised two years ago” ?

What I do know is that making 1+1 equal 3 in value is incredibly difficult and as I talk to more and more M&A executives, I believe that half the time, 1+1 never equals 2!  So how about the Synergy-dependent deals where value comes from cost synergies (1 + 1 = 1.5)?  If you are buying your prime competitor, you are most assuredly doing a Synergy-Dependent deal.

But if the historic claims are correct, two questions come to mind:

1. Why does company management believe they’re going to be part of the mere 17% who succeed?
   And........
2. What can a company can do to ensure that it becomes part of this exclusive minority?

The good news is that there are examples of success out there. A large manufacturer comes to mind, who bought a significantly larger competitor. They, too, believed that they would be able to integrate this competitor seamlessly into their operations and achieve the anticipated cash flow from synergies, despite the many challenges (long regulatory approval; cross border, multi-national consolidation; product rationalization and skittish customers).

The purchasing company had done several acquisitions in the past, but nothing of this size and complexity. However, the CEO did understand the “counterintuitive” nature of complex merger integration which is often contrary to running the business on a day-to-day basis.  Nuance approaches were introduced had to be taken to succeed:

• Speed:  Rapid decision protocols were implemented, fostered by well-structured integration and synergy capture teams that fed the Steering Team weekly.  Intense planning occurred long before close, benefitted by a six-month regulatory delay.
   
• Stability:  Key resources from the “sell-side” were going to RUN the integration while the “buy-side” continued to RUN the business and maintain stability with customers and employees.  There were no typical resource constraints because the CEO was willing to leverage the talent he was buying along with the talent he had inside.  Based on innovative incentives paid for capturing synergies quickly, these sell-side integrators were well compensated and recognized for their serious contribution to the new enterprise.

The Results

In eight short months versus the original planned 18 months, the combined operating and integration teams, along with only five expert advisors, were able to deliver cash flow at 331% of the announced expectations. The synergies captured were 175% of plan and sales productivity and talent flight remained within a tolerance of 5%.   And very importantly, the company’s stock price tripled over the subsequent 18 months. That’s right, it tripled in a tough market and a mature industry.

So, what was The Secret?

Almost completely hidden in the case study above were the words “only five expert advisors.”  I have to ask this question of the M&A community, “Given today’s technology advances to document methodologies, create playbooks and detailed tracking systems, and with some of the knowledge and experience garnered over the past two decades -- do we still need the busloads of consultants?”

Granted, the big consulting firms hire some of the brightest young minds available.  But here is the rub.  If hiring young, bright consulting generalists are the keys to success, why haven’t the overall results changed in the past 20 years?  Consulting companies have typically been hired for the large deals.

But as a last point, let’s talk about four fundamentals that will help M&A professionals make the right decisions when fielding the team to merge and consolidate a Synergy-dependent transaction:

1. Intimate knowledge of the companies being integrated
2. Maintaining the stability of all stakeholders (employees, customers, vendors, etc.)
3. Full-time focus by the operations team and the integration team
4. Deep integration expertise with proven methodology, tools and disciplined protocols

If all four of these ingredients aren’t present, a team will have to smart-source from the outside.  However, I see more and more companies today, building real, solid internal M&A competencies to effectively enable all four areas.

So, Synergy-dependent merger integration is counterintuitive to normal business practices. It requires full-time rigor and disciplined focus that drives rapid decision- making. Yet, change must be made in a way that stabilizes customers, talent and processes.  Companies which embark on integrating a Synergy-dependent merger themselves and don’t have a tried-and-true toolset and a full-time experienced integration team, quickly learn that actions take way too long, the good people end up leaving, sales decline and the synergies planned for simply evaporate in the process.

The real secret of success when synergies must be captured is the unique ability to utilize the internal resources (knowledge capital) of both merging companies. Rather than fielding a big team of consultants,  I recommend a small tactical team of integration specialists to coach the top executives and integration team (many of whom face being displaced in the merger). The combined team of specialists (who know the integration business) and merging company executives (who know THE business) creates a full-time, focused, incentive-based team that can and will get the job done.

And finally, by using the "sell-side" talent on the integration team, it will be possible to:

• Select some of the best, brightest and internally knowledgeable people for quick navigation through barriers
• Provide them extended employment with incentives for much higher earnings
• Grant them new and highly valuable experience
• Gain immediate and intimate knowledge of the companies being integrated
• Convert fixed cost employees to integration or restructuring costs
• Create incentives that stimulate a rapid and sound integration
• And, there may be found some extraordinary people for long-term roles who might have been otherwise overlooked!