This article aims to set straight the role of synergies in M&A value creation.
Synergies have been used to justify some of the worst and best M&A transactions in history. The term itself is open to interpretation and empirical evidence on the role of synergies in determining M&A outcomes is hard to find.
These authors start with a straightforward definition: synergies are the source of the tangible expected improvement in earnings that occurs when two businesses merge.
To examine the role that synergies play, the authors analyzed 286 major acquisitions in North America between 2010 and 2015. The amount of control premium, disclosures related to synergies, and progress against synergy targets were all factors analyzed.
For the 167 companies in the data set that announced expected synergies, the average premium paid was 34%. High-tech acquirers paid an average control premium of 40.1%.
When it comes to synergies, value-creating acquirers are different from others in the way they do three specific things: (1) they limit the control premium that they pay, (2) they are candid with their investors about synergy expectations, and (3) they practice rigorous postmerger integration to capture synergies fully and rapidly.
The research shows that acquirers should do their homework: they must be in a position to publicly announce the synergies they expect to result from the combination. Yet only 58% of 286 companies sampled announced synergies, and the percentage varied by sector.
Of the acquirers that initially announced synergies, only 29% then saw fit to follow up with investors on their progress against their targets. Those that did were further rewarded by shareholders, outperforming those that did not by a median of 6 percentage points nine months after their deals closed.
A company’s internal synergy expectations are typically significantly higher than the targets they provide publicly: on average, they are 15% higher for cost synergies and 21% higher for revenue synergies. In addition, companies that practice particularly rigorous postmerger integration exceed even their internal targets.
In the competitive bidding market for corporate assets, many acquisitions transfer all, if not more than all, of the synergy value from the acquirers’ shareholders to the seller’s shareholders. This is why more than half of all deals destroy value for investors.