Reading: Creating Value with M&A

Synergy: Projected vs. Delivered

We have seen throughout this chapter that synergies often are the heart and soul of M&A transactions. We have also seen that, broadly speaking, the expected synergies can take the form of additional revenues and/or lower costs. Following the logic of the income statement, synergies that bring additional revenue growth synergies are often referred to as "top line synergies" whereas cost synergies are called "bottom line synergies."

In an interesting survey conducted by McKinsey, participating firms were asked to what extent they actually managed to capture the projected synergies after the M&A deal. The following graph summarizes the most interesting results. It shows the proportion of acquisitions (vertical axis) that managed to capture a certain fraction of the projected synergies (horizontal axis). The blue bars refer to cost synergies and the red bars refer to growth synergies.
 

The main takeaways from this graph are:

• More than 1 out of 5 deals captured less than 20% of the projected growth synergies. Put differently, if these firms expected to generate growth synergies of 100 million, they actually captured synergies of less than 20 million.
• 5 out of 6 companies captured lower growth synergies than predicted. Only 1 out of 6 firms actually managed to exceed the projected growth synergies.
• It therefore seems to be the case that firms systematically overestimate the growth synergies associated with M&A transactions!
• Cost synergies are easier to predict. But they are also systematically overestimated.
  • About 9 out of 10 deals generate at least 50% of the projected cost synergies.
  • More than 4 out of 10 deals generate more than 90% of the projected cost synergies.
  • About every third deal generates higher cost synergies than projected.

The strong message from this graph therefore is that managers tend to be overly optimistic when projecting the synergy gains from a deal. It is therefore not surprising that many acquirers lose money, especially when they pay a hefty premium to the target company to access the alleged benefits from the merger.