Gulf News

Secrets for Creating More Synergies in Mergers and Acquisitions

Most deals fail to generate the synergies that companies expect.

By Philippe De Backer

Published on June 28, 2015
min read


This article was originally published in Gulf News. The open secret about 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 financiers. But Bain analysis comparing deal announcements with the performance of more than 22,000 companies has unveiled another, even more fundamental contributor to the rampant overestimation. Most merging companies entering a deal don’t 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 $100 million (Dh367.3 million) companies merge, they rarely know what the resulting cost structure will look like based on their industry’s existing $200 million companies. We found that across most industries we analysed, on average 70 per cent of companies announced higher synergy estimates than would be expected just by companies getting bigger. This is an issue of growing significance in the Middle East. The value of announced M&A deals with any Middle Eastern involvement was $22.7 billion in Q4 2014, more than double the value in the previous quarter and the highest total since the first quarter of 2008, based on a report by Reuters. *Read the full article at Gulf News.*

This article was originally published in Gulf News.

The open secret about 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 financiers. But Bain analysis comparing deal announcements with the performance of more than 22,000 companies has unveiled another, even more fundamental contributor to the rampant overestimation. Most merging companies entering a deal don’t 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 $100 million (Dh367.3 million) companies merge, they rarely know what the resulting cost structure will look like based on their industry’s existing $200 million companies. We found that across most industries we analysed, on average 70 per cent of companies announced higher synergy estimates than would be expected just by companies getting bigger.

This is an issue of growing significance in the Middle East. The value of announced M&A deals with any Middle Eastern involvement was $22.7 billion in Q4 2014, more than double the value in the previous quarter and the highest total since the first quarter of 2008, based on a report by Reuters.

Read the full article at Gulf News.