Jakarta Post

Overcoming Synergy Odds in a Merger

Most merging companies entering a deal do not have a clear understanding of the level of synergies they can expect through increased scale.

By Laura Miles and Suvir Varma

Published on February 28, 2015
min read


This article first appeared in The Jakarta Post. The open secret about merger and acquisition (M&A) is that most deals fail to generate the synergies companies expect when they announce a merger. In a Bain & Company survey of 352 global executives, overestimating synergies was the second most common reason for disappointing deal outcomes. One of the causes of this overestimation is well known: Companies set aggressive targets to justify a deal price to financers. But Bain analysis comparing deal announcements with the performance of more than 22,000 companies has unveiled an even more fundamental contributor to the rampant overestimation. Most merging companies entering a deal do not have a clear understanding of the level of synergies they can expect through increased scale. Instead, they typically make broad estimates based on prior deal announcements, without considering whether the cost structure of the combined entity is realistic based on benchmarks of like-sized companies. For example, if two US$100 million companies merge, they rarely know what the resulting cost structure will look like based on their industry’s $200 million companies. Across most industries we analyzed, on average 70 percent of companies announced higher synergy estimates than would be expected just by companies getting bigger. But the best companies justify higher targets and provide a roadmap for achieving them. They use the disruption caused by M&A to pursue broader changes like adopting zero-based budgeting initiatives and incorporate new ways of working that help them surpass rivals to become cost leaders. *Read the full article at The Jakarta Post.*

This article first appeared in The Jakarta Post.

The open secret about merger and acquisition (M&A) is that most deals fail to generate the synergies companies expect when they announce a merger. In a Bain & Company survey of 352 global executives, overestimating synergies was the second most common reason for disappointing deal outcomes.

One of the causes of this overestimation is well known: Companies set aggressive targets to justify a deal price to financers. But Bain analysis comparing deal announcements with the performance of more than 22,000 companies has unveiled an even more fundamental contributor to the rampant overestimation. Most merging companies entering a deal do not have a clear understanding of the level of synergies they can expect through increased scale.

Instead, they typically make broad estimates based on prior deal announcements, without considering whether the cost structure of the combined entity is realistic based on benchmarks of like-sized companies.

For example, if two US$100 million companies merge, they rarely know what the resulting cost structure will look like based on their industry’s $200 million companies. Across most industries we analyzed, on average 70 percent of companies announced higher synergy estimates than would be expected just by companies getting bigger.

But the best companies justify higher targets and provide a roadmap for achieving them. They use the disruption caused by M&A to pursue broader changes like adopting zero-based budgeting initiatives and incorporate new ways of working that help them surpass rivals to become cost leaders.

Read the full article at The Jakarta Post.