Video
Bain research found companies that engage in regular mergers and acquisitions activity outperform companies with lower activity, but often fail to reach synergy targets and find the integration a disappointment. Alex Egan Ramanathan, a partner in Bain's Mergers & Acquisitions practice, shares three ways companies can avoid disappointment and maximize merger potential.
Read the Bain Brief: Maximizing Your Merger's Potential
Read the transcript below.
ALEX EGAN RAMANATHAN: M&A activity is robust, and many companies are finding benefits in inorganic opportunities vs. organic growth opportunities. Bain research shows that companies that engage in regular M&A activity actually outperform, on a total shareholder return basis, companies that have lower M&A activity. However, many companies actually fail to reach their synergy targets, and ultimately find that the integration is a disappointment.
We found that there are three main things that companies can do in order to avoid that disappointment. The first is to ensure they're leveraging a very, very robust deal thesis—not just early on in the process, but actually to think through and create an integration plan that leverages that deal thesis and actually informs how they approach the integration overall. The second is to actually benchmark full potential. And Bain ran an analysis leveraging SAP and FactSet data, where we looked at 22,000 companies and created cost curves by industry to try and show where you would expect two companies that are integrating to land on that cost curve, based on the revenue of the new company.
And what we found when we actually compared the synergy targets to where we would expect them to be on that cost curve, is that 70% of companies were overestimating the synergy targets. Now, that's not necessarily a bad thing. However, they need to realize that their stated synergy targets are above and beyond what you would expect just from scale benefit, just by putting the two companies together and taking advantage of scale benefit alone. And so, companies who have those kind of targets need to actually think through not just integration, but also optimization.
And that means sharing best practices, doing capability building, really using the integration as a catalyst to ensure they are taking the best of the business and really, truly optimizing the business—not just simply integrating the two businesses and taking advantage of the scale benefit. And the cement hardens quickly, so companies really need to think about doing this while they're working through the integration process, and soon beyond in order to take advantage of the opportunities. So the bottom line is just to understand which path you're taking. And make sure that your integration plan is set up to integrate and optimize, if necessary, and therefore avoid disappointing results.
Read the Bain Brief: Maximizing Your Merger's Potential
First published in juin 2017