In 2000 the value of corporate mergers and acquisition activity set a new worldwide record for the tenth year in a row. And while there has been a slowdown in mega-mergers, there are still a very large number of transactions being undertaken.
Deal activity has not necessarily resulted in shareholder value. Pressure to complete deals quickly and ‘bolt on’ companies has led to value being lost by an inability to assess synergies and capture the benefits of implementation.
Sometimes the announcement of deals provokes a drop in share price rather than an increase.
In the present uncertain economic climate, CEOs are pressed to convince shareholders of the viability of an expansion project. To reinforce investor confidence companies have increasingly taken to releasing public statements about the synergy value that is expected to be realised on completion.
For both CEO and shareholder, judging whether value can be met is often a difficult task.
Research shows that acquirers who focus on synergies are 28% more likely to create shareholder value from their deal. While synergy evaluation alone is not enough to extract shareholder value a series of investigations at an early stage can enhance the probability of long-term success.
In addition to persuading the market of a deal’s relative desirability, acquirers can also utilise information from this process in the pre-deal negotiations and contribute to the integration planning process.
Shareholders need to understand the process of how a synergy figure is reached. As well as revenue enhancement being included in documents, recent deals have seen ‘after tax’ or ‘including capital expenditure’ comments alongside synergy statements.
Often a single synergy figure will not always truly highlight benefits such as an increase in sales or marketing spend. It is difficult though to quantify how often synergies are met by companies as post-completion evaluation seldom takes place.
Although the market is becoming more aware of synergies there is still a long way to go before synergy evaluation and planning are totally encompassed in the M&A process. Only by understanding the importance that synergies play in a deal can acquirers hope to pay the right price, convince the market of a deal’s merits and extract full value in the post deal phase.
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