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Making mergers measurable

Get out the microscope, and engage the Board in what you find

The majority of mergers fail to meet their intended goals. For those that are successful, the top reasons, per the KPMG Board Leadership Center, are, in order of importance:

  1. Well executed integration plan
  2. A correct valuation
  3. Effective due diligence

A well executed integration plan depends on effective due diligence. Frequently, not enough time is spent developing and detailing the anticipated benefits and synergies of the new company, and how to get them in the expected timeframe. Given the excitement of the merger, called ‘deal heat,’ assumptions are made without being sufficiently challenged or scenario tested.

Big picture, this of course means that the success of the acquisition and the M&A process cannot be accurately measured and tracked. It could mean that the acquisition or acquisition strategy itself is flawed.

Less obvious, perhaps, is the negative impact incorrect numbers could have in developing the new company’s operating model, and identifying cross team implications and necessary resource commitments. This also throws off the integration plan.

To be clear, synergies are financially measurable improvements beyond what is in each company’s budgets that result from business mergers. Examples include cost reductions due to fewer facilities or headcount, and increased revenue from cross-selling new products to new customers.

To make them measurable, a good synergy development process should:

  • Ensure all synergies align to the firm’s overall business strategy
  • Consider drivers of synergies, such as consolidating redundant functions
  • Identify the teams needed for detailed analysis to determine how savings will be achieved, and the resources and timelines required to do so

The principal high-level benefits from mergers and acquisitions are increased value generation, cost efficiency and market share.  To make this measureable, the devil is in the details. To capture potential benefits, consider these five areas:

1. Financial: financial restructuring or other financial changes

  •   Examples: better payment or debt covenant terms, reduced taxes

2. Revenue: increased opportunities for new revenue

  • Examples: new markets, cross-selling products

3. Asset: reduction of duplicative assets

  • Examples: inventory, owned buildings or equipment

4. Headcount: permanent employee reduction

  • Examples: reductions driven by process efficiencies or redundant position elimination

5. Goods and services purchased: decreased need, or better volume procurement deals

  • Examples: software, shipping costs, steel, office supplies

The Board should be constructively skeptical. It should test anticipated benefits via ensuring:

  • Strategic alignment of the acquisition
  • Demanding vetting of financial assumptions, market conditions, tax implications and overall valuation
  • The due diligence process is rigorous, and ‘deal heat’ and management bias is challenged with objective, informed questions and data driven discussions
  • A thorough process and dedicated resources to achieve anticipated benefits in the anticipated timeframe is in place
  • All deals are reviewed, one at a time and multiples over time, to find systemic internal acquisition process improvement opportunities

If M&A is a significant part of the organization’s strategy, the Board should consider setting up a focused M&A Committee.

Remember, synergies cannot be achieved if people aren’t dedicated to making them happen. Ensure there is strong, competent leadership, and sufficient capacity at all levels to take on the integration process.

Implementation plan development and execution either makes or breaks a merger.

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Summer I 2018

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