Arnaud Leroi: Maximizing Your Merger's Potential

ARNAUD LEROI: Over the last several years we've seen an extremely high level of M&A across the world. The winners—the ones that really outperformed their peers in their sectors—were really the ones who run on their two legs. The organic part and the M&A part. They reach an average 4.8% total shareholder return, versus 3.3% on the ones that only rely on organic growth. However, in that context, the expectations from the financial markets, from the activists, have increased in terms of value and synergies to capture.

And most of the companies actually failed to deliver on the synergies, so what can we learn from the ones that really achieved that and delivered the value? Number one—they really developed what we call a systematic, disciplined and rigorous approach on the synergy valuation and the value at stake. From the due diligence, the pre-integration, down to the post-merger integration. They used benchmarks, they used cost structure, and they used experience-curve assessment to really set the right targets, and understand how they could transform their business with a merger. But they didn't stop there.

What they did, also, was spend a lot of time thinking about how I'm going to sequence deployment of the synergies. And we see here three different approaches depending on the maturity of these companies. The number one is what we call the full potential optimization. These companies used the merger, not only to deliver synergies, but they really used them to transform the business and reach the next level of maturity on their business model, and on their performance.

The number two is what we call the capability breakthrough. This is typically relevant when the merger relies on one or two major functional transformations. Typically, procurement for retail, or R&D and go-to-market for industrial or domestic players. So you're really focused on these two functional transformations, and derive the best out of it.

The number three, probably more modest but still valid, is what we call a sequenced optimization. Companies that are sequenced deliverers of the synergies according to the value at stake and the risk related to that.

So, in conclusion, what do we learn from that? These companies that win really were very rigorous and disciplined in the evolution of the synergies, but also focusing on how to sequence that the best way in order to deliver the value, but also to mitigate the risks on the customer and on the employee side.

Read the Bain Brief: Maximizing Your Merger's Potential