M&As (mergers and acquisitions) make always big news, though not the demise of most of them. Lets face it: M&As dont always work, acknowledges Mr Rajesh Sennik, who leads Accentures Strategy Practice in India, based in Delhi.
Numbers about M&As tell a dismal story. Approximately 60 per cent of all mergers fail to create shareholder value, and less than a third create value that is noticeably higher than the industry average returns, Mr Sennik informs. But when M&As succeed, they can lay the foundation for a company to be the leader in its sector.
While there is no magic formula to guarantee the success of an acquisition, building a synergy case, a robust definition of the financial rationale for the acquisition can significantly increase the chances of success and help architect the integration, he explains, during the course of a recent email interaction with Business Line.
Mr Sennik reminds that, while mergers and acquisitions remain a potent source of fuelling growth, executives need to focus on the synergies that the deal promises and the plan to deliver these promises. For, After all, all is well only if it ends well.
Excerpts from the interview.
On the key ingredients of M&A success.
Based upon our experience, we have identified seven critical steps that can help improve the chances of building a robust synergy case:
1. Use benchmarks as a starting point (given lack of early access to information).
2. Maintain objectivity (especially for revenue synergies and cost to capture).
3. Use multiple perspectives to systematically generate a rich set of synergies.
4. Surface and test operational, strategic and financial assumptions.
5. Ensure synergies are high quality.
6. Actively balance requirement for buy-in versus exposure.
7. Redevelop synergy case immediately after the legal close.
Benchmarks on typical savings and revenue improvements dont provide the final answer but they can help you navigate better in spite of limited information that typically obstructs visibility during initial stages.
For example, cost synergies in a telecommunications transaction are typically between 15 and 32 per cent of the targets cost base. The range is driven by the degree of overlap in operations and the extent of regulatory or political constraints. The synergies arise through initiatives such as call centre consolidation, rationalisation of the sales force, procurement, network and IT (information technology) application.
Revenue synergies can be far more significant, particularly for mergers in emerging markets, where the focus is on growth. Increasing ARPU (average revenue per user) and reducing churn, through transfer of best practice and tariff changes, are typically the key drivers.
On maintaining objectivity.
There are multiple motives at play during a merger. The buy side looks to downplay synergies, since acknowledging synergies may trigger an upward price adjustment. The sell side, on the other hand, will try to inflate the synergies especially since they have no responsibility for their implementation.
This conflict of motives plays havoc with the formation of a true synergy case picture, especially on the backdrop of the intense, emotionally-charged atmosphere of a deal. Worse, it may cause loss of focus on the real issue. Lets not forget that capital markets are ruthless in their punishment of CEOs who fail to deliver stated synergies.
Areas where objectivity is normally compromised are revenue synergies, costs to capture, and headcount-related synergies. It is therefore critical to maintain objectivity while developing the synergy case. Third-party assistance using objective data and proven techniques like a clean room can be a key lever in this.
On multiple perspectives.
It can be tempting to pick up the profit and loss (P&L) statement and assign savings to each P&L item to form the synergy case. However, do not be deceived by the simplicity of this approach: it may be dangerous. You may end up with a synergy case bound by the cost structure of one business, and miss the opportunity to develop a rich set of synergies. A better way is to look from multiple perspectives, for example, common sources of synergies, synergy value drivers and basic questions.
On surfacing and testing assumptions.
In an environment with restricted access, it is challenging to form even an initial view on synergies. Adopting a policy of clearly accepting the assumptions can help you get around this obstacle. As more information is revealed by the other side, you can fine-tune your synergy case more accurately.
Generally we find that the overall number stays the same; its the mix that changes.
On ensuring that the synergies are of high quality.
A high-quality synergy case should satisfy the following criteria:
Assesses multiple scenarios and clearly defines the uncertainties driving them.
Clearly flags gross assumptions (that is, assumptions that apply across synergies).
Reflects the deal rationale.
Illustrates how costs to capture the synergies link to the synergies themselves.
Incorporates known strategic and market realities (especially on pricing and market share assumptions).
Clearly demonstrates interdependencies (for instance, between networks and products).
Demonstrates credibility (for example, has the synergy been achieved in other transactions?).
Respects general rules of thumb (capex/revenue, EBITDA per cent, IT spend/employee).
Accounts for cash flow impact of timing, taxes and costs to achieve.
Is consistently presented (for example, terminology, basis of calculation).
Forming such a synergy case forces you to sweat the detail and improves the chances of hitting the numbers.
On exposure versus buy-in.
On the one hand there is the need to involve operational managers in the formation of the synergy case both to improve its robustness and reduce execution risk. On the other hand, this increases the risk of exposure of the synergy to, for example, employees and the markets. Under such a scenario, the synergy case may acquire legitimacy even if it is half baked. This case can lead to increased employee anxiety and undermine the negotiation process.
So, how do you strike a balance between requirement for exposure and buy-in? The answer lies in having a dedicated workshop-driven process with a specialist team which is formally in the know.
Typically, four workshops are required over a timeframe of four to six weeks to form a robust synergy case (depending upon access to information on the targets operations). There are, of course, other standard tactics, such as restricting the number of people who know the full quantum of synergies to a handful.
On refining synergies.
Once you have full access to company information, the synergy case should be further refined. Using the synergy case approach, the overall quantum of synergies is likely to remain the same. The only difference is the mix of synergies and the accuracy of the synergy case.
This also provides an opportunity to implement change by broadening the definition of synergies, since the organisation is unfrozen during a merger. Good examples of where the definition can be broadened are tariff plans and existing operational changes.