2018 Global M&A: Synergies Take Center Stage

Buyers Capture Less of the Combined Synergy Value in Global M&A While Deal Prices Reach All-Time Highs, Finds New BCG Report

MUNICH—The tide in mergers and acquisitions is turning, according to The Boston Consulting Group (BCG)'s 2018 M&A Report, The 2018 M&A Report: Synergies Take Center Stage. The BCG report found buyers’ shareholders have been losing their hold on the synergy—the projected financial benefits of combining two companies—and forfeiting it to sellers as a takeover premium at deal closing.

Mergers and acquisitions continue to be a fact of business life and are, in addition, more costly than they’ve been in the last quarter century, spurred in part by companies’ slow organic growth, the need to add digital capabilities, and an abundance of cheap funding. Historically, buyers have kept two-thirds of the value of expected synergies—their reward for bearing the risk and responsibility for realizing them after closing. But today, buyers are keeping less than half of the synergy potential, with the remainder going to their targets’ shareholders through the price premium.

The Rising Price of Striking a Deal

“The synergies that buyers project and announce have increased every year since 2013. As a result, investors are becoming more skeptical about companies’ ability to deliver on these bolder promises,” says report coauthor Jens Kengelbach, BCG senior partner and head of the firm’s global Transaction Center. “Acquisitions are more expensive today than at any time since at least 1990, and buyers need to give away a higher share of the total value of expected synergies in order to strike a deal.”

The report is based on a dataset of more than 600,000 M&A deals going back to 1990. In addition, BCG compiled a proprietary database by collecting publicly announced synergies in the largest 1,000 deals of the last ten years. The research found that the median transaction multiple in 2017 was at an all-time high of 14.2 times EBITDA—a 4.6% increase from 2016, and higher than the peak valuation levels in 1997 (EBITDA multiple of 13.6x) and 2007 (EBITDA multiple of 13.7x). In addition, the expected synergies announced publicly by acquirers reached 2.1% of combined sales in 2017, almost twice 2011’s level of 1.1%.

Convincing the Market and Preserving Value

“In this environment, where buyers need to argue for higher takeover prices via higher synergies while also giving away a higher portion of the synergies up front to target shareholders, acquirers must redouble their efforts to ensure what they’re promising is really achievable–and convince the market of that,” says report coauthor and BCG principal Georg Keienburg. “Buyers’ internal decision makers–including the management team, the board, and the investment committee– should be wary of high synergy estimates, and scrutinize them.”

The report recommends that buyers:

  • Double down on quantifying and truly ‘hard-wiring’ the synergies, since they’re now often the “make-or-break” element of the case in a competitive auction process.
  • Communicate clearly about the synergy potential in the deal announcement to preserve value and reduce share-price volatility upon announcing a transaction. “Communicating synergies credibly to the capital markets makes a difference of almost 1% share price reaction upon announcement, and can turn the perception of a transaction from negative to value-creating,” Kengelbach says.
  • Give investors a comprehensive accounting of the synergies–including a breakdown of the type, and examples and requirements for achieving them.
  • Go after synergies from day one, which requires intense preparation in between the signing and closing of the deal.

Keienburg concludes, “To get a head start on value capture before the closing, leading companies establish a “clean team” to collect and analyze confidential information and prepare for synergy realization while complying with anti-trust restriction. To augment the post-merger integration process, they should have a full potential plan ready on day one that defines and quantifies the operational measures to achieve the estimated synergies, along with clear ownership and incentives for the management team to achieve them. The dealmakers who can make this happen will truly reap the rewards of value-creating integrations of acquired companies.”
A copy of the report can be downloaded The 2018 M&A Report: Synergies Take Center Stage.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

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