This post kicks off a series on synergy accountability, management and tracking. Worthwhile synergy programs always start with realistic synergy assumptions, well-vetted against market realities and substantiated with data where possible. Unrealistic expectations produce a toxic slurry of maladaptive behaviors and ultimately result in the loss of both top talent and shareholder value. We’ve discussed several keys to proper deal valuation and synergy expectation-setting in prior posts and as a refresher links are provided below:
Another key to realistic expectations lies in the preparation of the target operating model or TOM (see Apr-Nov 2018 for our extensive series on this topic). Careful TOM preparation will highlight what your business will need to do in order to realize the value of your acquisition.
Note that if you have a highly structured environment- one that features a high level of outsourcing, automation, complex metadata designs, etc.- it is likely that you will have higher integration costs than less structured companies. This is due to the need for the target to conform to your structure via a full, or nearly full, integration, in order for your existing structure to properly accommodate the target’s business needs. It follows that in order to pay the same multiple for the deal, you must also have superior operating margin capabilities that compensate for this cost differential. If superior revenue-generating capabilities are present, i.e. a superior distribution network, access to additional markets, etc. then the cost differential might be overcome in the near term; however, if a low-cost back office is expected to generate this additional operating margin on its own, a longer time horizon is often needed. So, when defining synergy expectations, be sure to consider not just the calculations, but also the horizon and time value of money.
Once your synergy business cases have been created, with the corresponding costs and benefits quantified and the time horizon projected, consider whether they should undergo an additional validation process. As with business case creation itself, there is a cost/benefit tradeoff to consider before commencing a validation exercise. Deals where the acquirer already has significant insight into the applicable business case inputs and deals that are minor investments may not warrant this additional level or rigor; however, substantial investments and deals where the acquirer has a less expertise generally benefit. Validation may include processes such as:
Each of these approaches has different advantages and drawbacks. Personally, I find the cross-functional business case reviews and the benchmarking to be the most useful in providing net new insights. Benchmarking and the use of strategy consultants to re-evaluate topline assumptions both have the advantage of being “arms-length” to the transaction; however, it is important to make sure that there is enough relevant data available. If your business relies heavily on a new technology such as blockchain, it isn’t clear that there is either enough data for benchmarking to be useful as yet, not that such data- from the very emerging stages of a new industry- is free of noise caused simply by industry growing pains.
Once you are comfortable that your synergies have been properly identified, properly valued, and that the timing horizon is realistic, you can begin to address accountability. This is where we will pick up in next month’s installment.
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