There has been much M&A activity in recent years, with many M&A cases being largely driven by value creation through synergy realization. However, according to several studies, only 30–40% of companies achieve their targeted cost synergies and only 10–20% their targeted revenue synergies within the set timeframe – which is rather alarming considering the magnitude of M&A investments.  

Based on our experience in supporting M&A projects, we have identified the key reasons determining what makes synergy capture successful and what does not. 

Companies have several stock explanations as to why they failed to achieve the intended synergies, such as that the synergy targets were only theoretical, or that unexpected changes invalidated the targets – which are rarely the real reasons. The underlying root issue is often related to the M&A process itself, or more specifically to discontinuity in the M&A process. 

For example purposes, the M&A process can be divided into three phases i) M&A strategy definition ii) transaction preparation and due diligence iii) transaction execution. Synergies relate to each phase as follows:

i) The synergy targets are defined.

ii) The synergy realization plans are made and broken down into actions.

iii) The synergy realization actions are executed.

Issues arise, as the people executing the different phases are, in many cases, not the same, and the cooperation between them is inadequate.

In the first phase, the synergy targets are commonly defined top-down by senior management or the Board of Directors, based on high-level benchmarks and initial estimates without validation from the operational level. The achievability of the synergy targets is seldom verified. 

In the second phase, due diligence is focused on historical financial performance instead of the target business plans and operating model, thus the due diligence provides limited support for future synergy estimates. Synergy plans are defined by mid-management again without validation from the operational level. The synergy realization actions are commonly planned within individual functional integration work-streams, focusing only on their own functions. Prioritization is limited and all synergies are of similar priority. 

In the third phase, the integration is often led through functional integration streams, with synergies as a minor part of the overall integration. Synergy follow-up and linkage to the P&L is commonly limited, resulting in ambiguity as to what is a synergy impact and what is the impact of something else.

Based on our experience of many cases, structure is the key to synergy realization within M&A processes. 

1. In order to avoid the issue of misalignment between the different M&A phases, a synergy management group is highly recommended. The group should include people from all levels of the organization, in order for senior management and operational level personnel to be in full alignment. The group should be responsible for achieving synergies in accordance with the M&A strategy throughout the whole M&A process, from strategy definition to integration execution and synergy realization. In practice, the group will be involved in:
   
   i) defining synergy targets during the M&A strategy phase, and verifying their alignment with the targeted deal value.
   ii) defining and prioritizing synergy realization plans and actions during the transaction.
   iii) ensuring achievability to the extent possible through due diligence (preparation phase).
   iv) managing and following-up synergy realization during the transaction realization phase and ensuring transparency as regards P&L.
   
   In addition the group will be responsible for adjusting the synergy targets throughout the M&A process as more information becomes available, and seeking the Board of Directors’ approval.
   
   
   
2. So as to avoid a “silo effect”, i.e. limited or no communication between functional integration teams regarding overall synergies, it is advisable to build the transaction execution/integration program according to defined synergy categories or work-streams. In addition, some non-synergy-related, function-specific M&A activities need to be taken into consideration, even though the main focus remains on the synergies. The work-streams should be built by cross-functional teams and plans should be broken down into activities that enable synergy realization and follow-up to take place by means of defined tools. Follow-up cannot be emphasized enough, as it is often neglected during the integration process. Without a standard way of following-up synergy capture, the focus is often turned to less value-adding activities.     

Although the M&A market continues to be active and synergy realization remains an essential part of value creation, many companies still struggle with synergies. In order to increase the likelihood of gaining the targeted synergies, seeing a P&L impact, and even creating a higher value deal than anticipated, a clear interlinked synergy management structure is required throughout the M&A process. The key is to assign a synergy management group for the entire M&A process, and to build the integration structure according to defined synergy work-streams.

Max Aro
Senior Manager, Global Strategy Group
+358 20 760 3459
firstname.lastname@kpmg.fi