Making Deals Successful

Transcription

1 Making Deals Successful PwC s M&A Integration Survey 2013

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3 Preface Preface Surprisingly, we managed the integration and grew together. 1 Is integration success blind luck or a manageable and transparent process? The respondents opinion is clear while the overall and general integration direction and parameters are predefined in many cases, detailed measures and approaches that lead to integration success are often unclear. Our latest M&A Integration Survey provides you with an overview of the challenges serial acquirer face, the experiences they make and the different motives they have when integrating companies. We noticed that value creation methods in transactions are consistently evolving intrinsic growth and operational improvement have become more important deal drivers. Acquirers usually do not complete a transaction without having a clear vision for the merged companies. This is a positive trend which is supported by the survey results and increases the chances for the newly formed business to flourish. However, signing the contract and preparing the closing does not determine the end of the transaction process. We noticed that, in practice, the subsequent integration execution efforts are still underestimated. It is important to master the approach for essential integration tasks like the stabilisation of daily business, motivation of employees, harmonisation of functions, and realisation of quick wins. But to reach new levels of excellence and transaction potential, integrations must go far beyond these tasks. Being in a time of change, structural and organisational transformations allow companies to reorganise the business, gain flexibility, and meet changing markets expectations. Conducting full-potential transformational M&A Integration projects will help to maximise the enterprise value. We would like to thank the survey participants, who supported us by completing our questionnaire. Their contribution enabled us to develop credible findings and a consolidated view on the M&A Integration landscape. We believe you will find the survey results interesting and enlightening. Your M&A Integration Survey team Our experience shows that M&A Integration is a well-known phrase in the transaction business, particularly for serial acquirers who keep large specialised departments at hand for this task. However, we also see that many post-closing processes are still in need of professionalisation utilising qualified M&A approaches and integration methods. 1 Survey participant. Making Deals Successful 3

4 Contents Contents List of figures...5 About this survey...7 Key highlights...8 A Direction setting lay the foundations and concentrate on individual deal value drivers...10 B The path to deal success detailed planning, stringent execution and constant monitoring Integration activities and timing Complexity of an integration...17 Deep dive: Diligence makes the difference Success metrics...20 Deep dive: Professional support not initially planned for but explicitly needed...23 C D E Functional diversity apply customised approaches for different functions and keep an eye on the urgency of change...24 The rocky road to synergy realisation bottom-up planning, clear responsibilities and profound knowhow...26 Deep dive: Acquirers pay for synergies...29 Nine issues to be addressed and not always easy to solve...32 Contacts Making Deals Successful

5 List of figures List of figures Fig. 1 Fig. 2 Fig. 3 Fig. 4 Fig. 5 Fig. 6 Fig. 7 Fig. 8 Fig. 9 Fig. 10 Fig. 11 Fig. 12 Fig. 13 Fig. 14 Fig. 15 Fig. 16 Fig. 17 Sector of respondents...7 Importance and level of achievement of success factors classifying an integration as successful...11 External growth like gaining new customers and products are the most important strategic aspects...12 Sales and profitability are the financial objectives deal makers focus on...13 Many activities are planned pre-deal but not actually approached during the integration...15 Most deal makers start planning their integrations in a timely manner...16 The overall integration time needed is underestimated...16 Returning to daily business determines the end of an integration for more than half of the respondents...17 Highest complexity for survey respondents stems from complex legal structures and cross-border integrations Almost all deal makers use the results of the due diligence post-closing...18 Nearly 20% of the survey participants did not develop any integration plans during the due diligence phase...18 The favoured due diligence reports for M&A Integrations expose operational, commercial and financial aspects...19 Most of the survey respondents make use of success metrics during an integration...20 The majority of the deal makers rely on financial-related success metrics to measure their integration success...21 Monthly quantification of success metrics is most common for the survey participants...22 The integration success is tracked and monitored for one or two years post-closing...22 The most inquired consultancy service is professional project management...23 Making Deals Successful 5

6 List of figures Fig. 18 Fig. 19 Fig. 20 Fig. 21 Fig. 22 Fig. 23 Fig. 24 Fig. 25 Core business processes show lower levels of integration depth than non-core processes...25 There is a discrepancy between the importance of synergies over the course of an integration and the actual achievement...27 There is no predominant reason for failing in synergies, but rather a variety of motives...28 Deal makers report on a bundle of dissynergies...28 Acquirers pay a premium on target companies justified by expected synergies...29 More than half of the respondents expect synergies between 7 and 12% of the target s revenue...29 Deal makers are too optimistic in assessing the timing when synergies become effective...30 In many cases expected synergies have been overestimated Making Deals Successful

7 About this survey About this survey Making Deals Successful is the latest study exploring the trends, challenges and triggers of M&A Integrations in a rapidly changing deals environment. By making a thorough selection of the survey participants, we tried to provide you with the most valuable insights. The findings reflect the experiences of more than 300 deals. We created an online survey to facilitate the process for the participants and to make it as easy as possible for them to provide us with their unique experiences and knowledge about M&A Integration. We ensured that all participants had in-depth knowledge of the transactions they were reporting on. Of the surveyed respondents, 44% were at the executive level with such titles as CEO, CFO, Head of M&A or Head of Strategy. The remaining 56% were senior managers in the areas of M&A and Post Merger Integration. Fig. 1 Industries Sector of respondents Deals >300 Industrial Products 34% Financial Services 12% Automotive 6% Healthcare 6% Retail and Consumer 6% Executive level participants 44% Technology 15% Chemicals 9% 6% Media and Telecommunication Transport and Logistics 6% Senior management 56% Revenue 3% 3% 12% 16% Companies listed 59% mil mil 750 mil 1 billion billion 15% 18% 12% 21% billion 5 10 billion billion > 30 billion Note: The respective answers of the best-in-class survey respondents are marked in grey. Making Deals Successful 7

8 Key highlights Key highlights 8 Making Deals Successful

9 Key highlights A Direction setting lay the foundations and concentrate on individual deal value drivers Deal makers should not choose generic methods to achieve their integration objectives. Different industries, business models, company sizes, and products require distinct and customised approaches to achieve the full value of the transaction. Being realistic and focusing on the topics that really matter to your individual deal will bring lasting integration success. All this needs to stand on a solid basis comprising guiding principles and governance structures (page 10 13). B The path to deal success detailed planning, stringent execution and constant monitoring Integrations require merger-specific and focused activities performed at the right time during the transaction to achieve the full value-add to the companies. Strong management commitment/sponsorship and a clear project setup with governance structures are the activities utilised most by the respondents. In addition, the definition of the target operating model, empowerment of the right internal resources, and avoidance of disruption to daily business are not less important. To measure the integration progress and success, nearly all survey participants installed financial related success metrics (page 14 23). C Functional diversity apply customised approaches for different functions and keep an eye on the urgency of change Integrating companies on the whole or in part is highly complex it requires a comprehensive approach to build the big picture as well as a detailed idea of how to integrate all relevant individual business functions. Functional diversity is the key word. A one-size-fits-all approach does not lead to the ideal results. The survey results show that supporting functions reveal higher levels of integration and are more often approached than core business functions (page 24 25). D The rocky road to synergy realisation bottom-up planning, clear responsibilities and profound knowhow Realising synergies in the context of transactions is one of the most decisive topics deal makers need to manage. It is not only about monetising synergies; in fact, successful management comprises the precise analysis and determination of adequate levers of synergies accompanied by the assignment of clear responsibilities and extensive functional and process knowhow. They usually do not just happen. The achievement has to be planned in advance: ideally during the pre-deal phase and definitely before singing. Keeping this in mind, synergies can boost the performance of the deal. However, deal makers report a great discrepancy between the relevance of synergies as a success factor and the actual achievement of the planned synergies (page 26 31). Making Deals Successful 9

10 Direction setting lay the foundations and concentrate on individual deal value drivers A Direction setting lay the foundations and concentrate on individual deal value drivers 10 Making Deals Successful

11 Direction setting lay the foundations and concentrate on individual deal value drivers What drives your integration project to success? The determination of success factors is crucial not only to measure the integration performance but also for strategic direction setting. Not surprisingly, the survey participants stated strategic, financial, and synergy objectives as their most important success factors to achieve the full integration potential (Figure 2). A high degree of achievement with strategic objectives is not unusual; in many cases, they are achieved at the moment both parties agree on the deal. However, a more detailed view is necessary to get an integrated picture on these objectives. Figure 2 differentiates between the importance of the respective factor and the degree of achievement. Especially in the areas of generating synergies, many companies show room for improvement. This is no significant change compared to our 2009 survey results where one quarter of the participants have not been satisfied with the realisation of their synergy potentials. Employee satisfaction and the adherence of the predetermined project timeline are notably less relevant for the acquirers. Our project experience shows that many deal makers apply unrealistic assumptions, insufficient implementation strategies, and inappropriate metrics when prioritising their success factors. Some might be of greater importance at the beginning of a transaction some more to the end. What counts is to focus on your individual deal preferences that matter most. Fig. 2 Importance and level of achievement of success factors classifying an integration as successful How important do you classify the respective success factor and to what degree did you achieve the factor? Importance Synergy objectives Adhered timeline Financial objectives 75% 78% 28% 29% 66% 85% Operational objectives 63% High employee satisfaction Strategic objectives Retention of keyemployees Achievement Bubble size reflects the percentage of participants applying the respective success factors as indicator for successful integrations. Making Deals Successful 11

12 Direction setting lay the foundations and concentrate on individual deal value drivers The following section breaks down the strategic and financial success factors into more detail. The results show, that buyers focus on external growth as their main strategic transaction objective. The prospect of integrating new products into their portfolios and the desire for new customers are the main drivers for the participants. This holds true for both the best-in-class companies and the total peer group. Additionally, an increase in market share accompanied by a reduction of potential competitors is a very common strategic goal of deal makers. In many cases, deal makers achieved or even overachieved the set objectives. These optimistic results reflect the fact that many strategic objectives are achieved at the moment the deal is closed and do not need further integration efforts (Figure 3). However, to reach new levels of strategic and operational excellence buyers need to undertake distinct actions post-deal. 72% New customers Fig. 3 External growth like gaining new customers and products are the most important strategic aspects What were your strategic objectives and to what degree have they been achieved? New customers 86% Net achieved: 86% 10% 5% 62% New products New products 11% 78% 11% Net achieved: 89% 59% 48% 48% Increase in market share/ reduction of competitors New technologies/ R&D knowhow New sales channels Increase in market share/reduction of competitors 18% 76% 6% Net achieved: 94% New technologies/r&d knowhow 7% 86% Net achieved: 93% New sales channels 7% 79% 14% 7% Net achieved: 79% 41% New markets New markets 67% Net achieved: 67% 25% 8% 34% 21% New management capabilities/professional competence Enhanced reputation New management capabilities/professional competence 80% 20% Net achieved: 80% Enhanced reputation 17% 83% Net achieved: 100% Overachieved Achieved Partly achieved Not achieved 12 Making Deals Successful

13 Direction setting lay the foundations and concentrate on individual deal value drivers In general, participants state more difficulties in achieving financial objectives than strategic ones. The most relevant financial success factors are sales and profitability (Figure 4). Focusing on those two, it becomes apparent that more than half of all responses indicated only a partial or non-achievement of set targets. This might arise from frictional losses in the beginning of a transaction, inappropriate integration activities or too optimistic target setting. Just building a combined company does not increase profitability one has to change and optimise processes, systems, and structures to reach new levels of economic viability. To boost sales one needs to be aware of cannibalisation effects within the newly combined product portfolios and increased needs to achieve cross-selling potentials. However, transactions are good triggers to initiate such changes and turn arounds. 96% Sales Fig. 4 Sales and profitability are the financial objectives deal makers focus on What were your financial objectives and to what degree have they been achieved? Sales 8% 44% 48% Net achieved: 52% 85% 42% Profitability Cost reduction Profitability 9% 36% 45% 9% Net achieved: 45% Cost reduction 64% 36% Net achieved: 64% 35% Cashflow/liquidity optimisation Cashflow/liquidity optimisation 11% 56% 33% Net achieved: 67% 27% Working capital optimisation Working capital optimisation 14% 43% 43% Net achieved: 57% Overachieved Achieved Partly achieved Not achieved Making Deals Successful 13

14 The path to deal success detailed planning, stringent execution and constant monitoring B The path to deal success detailed planning, stringent execution and constant monitoring 14 Making Deals Successful

15 The path to deal success detailed planning, stringent execution and constant monitoring 1 Integration activities and timing Lessons learned are quickly forgotten It is common sense to learn from your previous mistakes and set goals how to improve integrations in future transactions. The survey findings reveal that many of the participants initially planned to undertake certain activities but reduced this number drastically during their integrations. The results show that management commitment and sponsorship is initially planned but fully performed and executed by only three quarters. Comparable results can be found for other activities (Figure 5). This supports our hypothesis from the previous section saying that focus on your individual value drivers is key. Buyers should concentrate and prioritise activities that are most important for the respective phase of the deal. This helps to allocate resources and tasks efficiently and reduces negative implications on the deal. Remarkable is that the need for professional support is often underestimated. Fig. 5 Many activities are planned pre-deal but not actually approached during the integration Which activities should be of primary focus in an ideal integration, and which activities did you actually approach? Management commitment/sponsorship Clear project structure/setup, responsibilities, governance Definition of Target Operating Model No disruption of daily business 44% 47% Selection of the right internal resources 41% Core business function integration Speed in executing Speed in decision making Change management 26% 44% 41% Incentivisation of responsible persons 38% 29% Non-core business function integration 29% 27% Support through external consultants 12% 35% 65% 65% 62% 62% 56% 53% 53% 59% 71% 76% 91% 100% Activities planned Activities actually approached Making Deals Successful 15

16 The path to deal success detailed planning, stringent execution and constant monitoring A positive signal is that many deal makers start their integration planning activities before signing (Figure 6). The gained flexibility in time management till closing enables deal makers to thoroughly plan and prepare all integration activities necessary to perform a frictionless transition. However, the overall time needed for integrations is underestimated with a time delay of approximately six months. The majority of participants report that it takes them between seven and 18 months post-closing to complete their integration activities (Figure 7). The experience shows that in today s M&A market the players know when to initiate integration activity, but it is still difficult to estimate the time to completion. This is noteworthy because half of the participants have conducted more than eight transactions. In the end, returning to daily business determines the end of the integration for more than half of the deal makers (Figure 8). This should be considered critically, however. Many unapparent but not insignificant integration activities may still not be finally concluded when returning to daily business. Fig. 6 Most deal makers start planning their integrations in a timely manner When did you start planning your integration? Percentage of respondents #1 #2 83% 9% 17% 6% Pre-signing At signing Between signing and closing After closing Fig. 7 The overall integration time needed is underestimated How much time did you plan for the finalisation of your integration activities and how long did it actually take? in % > 36 Time planned in % Time needed % 16 Making Deals Successful

17 The path to deal success detailed planning, stringent execution and constant monitoring 2 Complexity of an integration What drives the complexity of an integration? The results are not clear (Figure 9). The highest complexity for survey participants stems from complex (legal) structures and crossborder integrations of the merging parties followed by complex business models and cultural differences. But complexity is not unusual during an integration and can be managed watching out for the right activities, resources and timing. Being aware of and proactively addressing the most common pitfalls make it a lot easier for the merged companies to overcome them. It is not really a surprise that in today s economic environment companies need to think outside the box and act globally. They need to follow their customers and the markets to where they can best capitalise on their products. This implies that integration activities should not only focus on hard integration issues (eg, legal regulations) but should also pay attention to soft barriers of a deal. In addition, our project experience shows that more and more deals are completed with a focus on the Asian market no matter the acquirer or the target is located there. Thus, multinational teams of experts are required more and more to successfully overcome these challenges. Fig. 8 Returning to daily business determines the end of an integration for more than half of the respondents What determines the end of the integration process? Complete return to daily business #3 53% #1 Achievement of operational objectives 26% There is no clear end 26% Centrally determined by management 24% Achievement of synergy objectives #2 22% Achievement of strategic objectives 21% Achievement of financial objectives 15% Fig. 9 Highest complexity for survey respondents stems from complex legal structures and cross-border integrations Which factors drive the complexity of an integration? #1 Complex (legal) structure Cross-border integration #2 64% Complex business models of the integration parties Cultural differences Insufficient/inappropriate qualification of internal resources Number of stakeholders No clear intergration governance/rules, no clear project 33% Legal regulations 27% 48% 52% 58% 56% 67% #3 Tight timeline 24% Making Deals Successful 17

18 Deep dive: Diligence makes the difference The first thing to be completed in the course of a transaction process is a thorough due diligence covering different views on the target. Getting a comprehensive picture of what you are purchasing is a requirement for future success. The survey results show how important due diligence has become for any deal, and in particular, for the subsequent integration phase. The due diligence findings reveal upsides and highlight potential challenges and risks in the transaction. One should use them to kick-start a successful integration project and to leverage the transaction progress. Figure 10 shows that the majority of deal makers use the results of the due diligence post-closing. In addition, most of the respondents started to develop integration and synergy plans during this phase (Figure 11). Concerns about future sunk costs in the case of a potential deal break-up are not vindicated; the tremendous positive effects for the potential deal and subsequent integration process outweigh these fears. Regardless of this fact, other stakeholders involved require due diligence reports, and it would be irresponsible for the buyer not to conduct a thorough investigation of the target. In addition, over the last few years due diligence has evolved from being a pure risk report to an opportunity-driven roadmap to deal success. Fig. 10 Almost all deal makers use the results of the due diligence post-closing Did you use the results of the due diligence phase for the subsequent integration? 39% 55% 6% Used extensively Used selectively Not used Fig. 11 Nearly 20% of the survey participants did not develop any integration plans during the due diligence phase Were integration plans developed as part of the due diligence phase? 23% 58% 19% Extensively developed Selectively developed Not developed 18 Making Deals Successful

19 The favoured due diligence reports for integrations expose operational, commercial and financial aspects (Figure 12). It is not surprising that the operational and commercial due diligence focus on fundamental aspects for the upcoming integration process. Another fact stated by respondents is that deal makers know what specific kind of report they need, and thus, focus on those with the highest value-add for their individual transaction. Time and money constraints impede them conducting numerous analyses to back up their decisions. Fig. 12 The favoured due diligence reports for M&A Integrations expose operational, commercial and financial aspects The results of which type of due diligence showed the biggest value-add for the subsequent integration? Operational DD Commercial DD Financial DD IT DD Human Resources DD Legal DD Tax DD Environmental DD 20% 27% 31% 39% 52% 63% 61% 77% Making Deals Successful 19

20 The path to deal success detailed planning, stringent execution and constant monitoring 3 Success metrics What gets measured gets done this holds for complex transactions and integrations in particular. The survey results show that these who do not make use of any metrics or key performance indicators as part of their integration are in the minority. This can be seen as a positive development compared to our 2009 survey where this number was significantly higher (Figure 13). Fig. 13 Most of the survey respondents make use of success metrics during an integration Do you use success metrics to measure your integrations? % 27% 91% 9% Used success metrics Have not used succes metrics Used success metrics Have not used succes metrics When it comes to measuring the integration progress, deal makers rely on the following financialbased metrics: profitability, revenue development, and one-off costs (Figure 14). That applies to the best-performing companies too. But why profitability? In the end, every transaction needs to pay off. Profitability includes the economic power of a company applied to different industries, geographical regions and business functions in one easy-to-measure metric. It is interesting, though, that two out of three survey participants work for listed companies for which stock price development is the most irrelevant financial criterion to measure integration success. 20 Making Deals Successful

21 The path to deal success detailed planning, stringent execution and constant monitoring Fig. 14 The majority of the deal makers rely on financial-related success metrics to measure their integration success Which success metrics did you use to measure whether the integration was successful or not? Which financial related success metrics did you use? Which non-financial related success metrics did you use? 82% 56% Employee satisfaction/fluctuation 9% 63% Customer satisfaction 47% Change in market share 46% Market reputation 32% Profitability Revenue 89% 86% One-off costs of the integration process 64% Cashflow/liquidity optimisation 43% Headcount restructuring (core business functions) 29% Capex/working capital 25% Fixed costs degression 21% Headcount restructuring (non-core business functions) 21% Stock price development 4% Financial-related success metrics Non-financial-related success metrics No success metrics have been defined The non-financial metrics show a balanced set of applied criteria with a slight focus on employee satisfaction and fluctuation. Although easy to measure, our project experience shows that management does not pay much attention to provided data and analysis regarding key employees and workforce (Figures 14). However, the best performing deal makers concentrate more on the people-side of the deal and shift their preferences to customer and employee satisfaction rather than to market share and reputation. Making Deals Successful 21

22 The path to deal success detailed planning, stringent execution and constant monitoring When it comes to the frequency with which metrics are measured, the majority of the participants quantify their metrics on a monthly or quarterly basis for 13 to 24 months postclosing. The on-going tracking of the integration success is inevitable and a positive development compared to our recent survey findings. A period less than 13 months does not adequately reflect the time lag needed to observe any positive or negative changes (Figure 15/16). Fig. 15 Monthly quantification of success metrics is most common for the survey participants How often did you measure success metrics during the integration? 63% 20% 3% 3% 7% 3% Weekly Monthly Quarterly Yearly Not regularly Once at the end of the integration Fig. 16 The integration success is tracked and monitored for one or two years post-closing How long did you use success metrics to measure your integration process post-closing? 30% 33% 10% 7% 7% 10% 3% 1 6 months 7 12 months months months months months < 36 months 22 Making Deals Successful

23 Deep dive: Professional support not initially planned for but explicitly needed As shown in Figure 5, deal makers often do not initially plan for external consultants to support their integration. However, during the process, many of them face problems due to a lack of deal and integration experience. The PwC experience shows that internal costs that turn out higher than planned for and compulsory one-time investments are very common, but often unplanned for. Therefore it may makes sense that deal makers bring in professional service firms to provide process, functional and industry knowhow and to carry out integration activities. The demand for service providers is beyond dispute and indispensable, though many deal makers are serial acquirers and show plenty of experience. But where is the assistance most required? The most requested consultancy service is professional project management (Integration Management Office) followed by support for finance and accounting functions and IT (Figure 17). Unsurprisingly, many companies usually reveal sufficient in-house expertise to cover upcoming challenges in core functions simply because that is their value-adding business. The picture changes when considering the companies reporting superior deal success. They hardly need support in project management activities but in change management issues. #2 47% IT #1 #3 38% 34% 25% 21% 13% 9% 34% 13% 63% 50% 34% 50% Process planning HR Synergy management Change management (incl. communication) Organisational design Management functions After sales Procurement IMO Sales/marketing Other Finance/ controlling/ accounting Fig. 17 The most inquired consultancy service is professional project management In which business functions did you need external support? #3 #2 #1 Integration Management Office (IMO) 75% 20% 5% Other 80% 13% 7% Finance/controlling/accounting 67% 20% 13% IT 60% 20% 20% Process planning 67% 17% 17% HR 36% 36% 27% Synergy management 82% 18% Change management (including communication) 82% Organisational design 50% 25% 25% Management functions 67% 17% 17% After sales 50% 50% Procurement 25% 75% Sales/marketing 67% 33% Production (including quality) 100% R&D 33% 67% 9% 9% 9% 9% Production (incl. quality) R&D Extensive support Normal support Little support Making Deals Successful 23

24 Functional diversity apply customised approaches for different functions and keep an eye on the urgency of change C Functional diversity apply customised approaches for different functions and keep an eye on the urgency of change 24 Making Deals Successful

25 Functional diversity apply customised approaches for different functions and keep an eye on the urgency of change Upon closer inspection of the functional level, it is clear that some functions are more commonly integrated than others. The results show that finance and IT are the most common functions that deal makers approach (Figure 18). Fig. 18 Core business processes show lower levels of integration depth than non-core processes How long did it take to integrate the respective business process and how deep was the level of integration? Integration depth Management functions 72% Other corporate functions 91% 81% Procurement 75% Finance 78% HR 63% R&D 50% After Sales Marketing IT Sales Production Duration of integrations Non-core business function 84% 84% 88% 59% Core business function Bubble size reflects the percentage of participants applying the respective success factors as indicator for successful integrations. In general, respondents focus on support and administrative functions when conducting integration activities. This shows no change to previous survey results. It is underpinned by the fact that it is far more challenging to integrate value-adding processes that cause fundamental structural changes within the organisation. Integrating companies on the whole or in part requires a comprehensive approach to create a big picture as well as a detailed idea of how to integrate all relevant business functions. A onesize-fits-all approach does not lead to ideal results. On a functional level, the integration time and degree vary. Support functions generally require shorter timeframes for integration. Longer integration periods are required for integration of core processes, such as research and development, sales, and production (Figure 18). This does not hold true for IT, revealing a special integration challenge. Experience shows that harmonising and integrating the IT infrastructure and landscape take longer than any other business process. It is not unusual that IT processes, networks, systems, and infrastructures require years to be fully harmonised. However, integration activities come with tremendous upsides. Being a time of change, structural and organisational transformations allow companies to deploy quick wins, realise synergies or even reorganise the company. Making Deals Successful 25

26 The rocky road to synergy realisation bottom-up planning, clear responsibilities and profound knowhow D The rocky road to synergy realisation bottom-up planning, clear responsibilities and profound knowhow 26 Making Deals Successful

27 The rocky road to synergy realisation bottom-up planning, clear responsibilities and profound knowhow The study reveals a discrepancy between the relevance of synergies as a success factor for transactions and the actual achievement of the desired synergies (Figure 19). Most of the serial acquirers classify synergies as a success factor, but only half actually achieved to put them into practice. This leaves plenty of room for improvement. This cannot be satisfying, as synergies can play a decisive role for the future development of the merged companies. However, one should not overweight the impact of synergies; how they are planned in the pre-deal phase is crucial to the extent to which they are achieved afterward. Deal makers should be prepared for possible downturns and question whether all cost savings are due to synergy effects. They should be realistic and critically evaluate and involve the respective business functions. Fig. 19 There is a discrepancy between the importance of synergies over the course of an integration and the actual achievement 76 % 46 % 24 % 54 % Synergies as a success factor Synergies achieved Yes No But why is it so difficult to achieve synergy objectives? Incorrect planning? Inappropriate measures? Slow execution? Probably a mixture of all. Synergies usually do not just happen. Their achievement has to be planned thoroughly in advance: ideally during the pre-deal phase and definitely before signing. It starts with the definition of synergy areas, which are usually aligned to respective business functions. Data are gathered to set the right measurement parameters, followed by the analysis and identification of relevant synergy potentials. Are there double-counts or cross-effects? Later, the actual synergy measures are approved and implemented. That is a complex process that requires a mix of functional and process knowhow and profound deal experience. Otherwise, upsides may turn into cost drivers. Making Deals Successful 27

28 The rocky road to synergy realisation bottom-up planning, clear responsibilities and profound knowhow Figure 20 shows the most common reasons respondents reported for failing to reach planned synergies. There is no predominant reason, but deal makers encounter a variety of causes. Looking on the dissynergies the survey participants faced during their integrations cost increase is ranked first followed by increased employee fluctuation and loss of key employees. As with the reasons for failing there is no predominant lever for dissynergies (Figure 21). Fig. 20 There is no predominant reason for failing in synergies, but rather a variety of motives What were the reasons for failing to reach the planned synergies? 50% 48% 42% 41% 38% 8% Inappropriate synergy levers Insufficient implementation, execution and planning Frictional losses Missing management support/sponsorship Too little time Insufficient/ inappropriate qualification of resources Fig. 21 Deal makers report on a bundle of dissynergies Which types of dissynergies have been occurred? 41% 39% 37% 33% 32% 29% 18% Cost increase Increased employee fluctuation Loss of key employees Employee dissatisfaction Unused opportunities Revenue decrease Frictional losses 28 Making Deals Successful

29 Deep dive: Acquirers pay for synergies Do acquirers pay a premium on target companies just because they expect planned synergies? Yes, they do. The results show that nearly all participants justify paying a premium for possible upside effects (Figure 22). This is interesting considering the fact that half of the respondents only partly fulfilled their desired synergy expectations. Figure 23 shows the percentage of the target s revenue that deal makers plan to achieve in synergies. Interestingly, the best-in-class respondents are far more moderate with their synergy assumptions compared to all respondents. Fig. 22 Acquirers pay a premium on target companies justified by expected synergies Did calculated synergies justify the purchase price? 38% 58% 4 Yes Yes, partly No Fig. 23 More than half of the respondents expect synergies between 7 and 12% of the target s revenue What were the calculated synergies of target s revenue in per cent? > 15% 13 15% 10 12% 4% 25% 33% #2 7 9% 29% #1 4 6% 1 3% 0% N/A 8% 8% Making Deals Successful 29

30 The rocky road to synergy realisation bottom-up planning, clear responsibilities and profound knowhow Evaluating and planning synergies is essential. However, the right timing is no less important. Figure 24 shows that deal makers are too optimistic in assessing the timing when synergies will become effective. A time delay of six months in synergy realisation is the rule. Most respondents are able to realise their planned synergies between 13 and 18 months post-closing. Noticeable is that a remarkable number of participants take more than three years to achieve synergies. It takes many organisational and structural changes to deploy positive effects and even longer until these are reflected in the company s financial numbers. However, the best performing companies are able to assess the time required for synergy realisation very accurately. Their planned and achieved timeframe is between 13 and 18 months post-closing, too. But they were aware of this before and do not have to suffer from any time delays or postponements. Fig. 24 Deal makers are too optimistic in assessing the timing when synergies become effective What was your planned timeline to realise the full synergy effects and how long did it actually take? in % months 7 12 months months months months months > 36 months Planned time Achived time 30 Making Deals Successful

31 The rocky road to synergy realisation bottom-up planning, clear responsibilities and profound knowhow Figure 25 highlights the individual business functions and compares expected and achieved synergies. In many cases, possible synergies have been overestimated. The reasons for this are insufficient planning, incorrectly defined and executed measures as well as an incorrect selection of areas of synergies. However, highest synergies have been achieved in core processes like sales, procurement and production. In these functions, it is more difficult to realise quick wins, but once synergies are achieved, they have the greatest financial impact. Deal makers should balance between costs and benefits while keeping an eye on the big picture. Surprisingly, IT- related synergies have generally been underestimated. Fig. 25 In many cases expected synergies have been overestimated In which business functions did you expect the highest synergies and in which did you actually deploy the highest? Sales/marketing Procurement Production (including quality) 35% Finance/controlling/accounting 35% 23% Management functions 31% 27% IT 27% 31% R&D 27% 23% HR 16% 14% After sales 12% 8% Other 35% 38% 46% 62% 58% 83% 80% Highest expected synergies Highest achieved synergies Making Deals Successful 31

32 Nine issues to be addressed and not always easy to solve E Nine issues to be addressed and not always easy to solve Making Deals Successful is no wishful thinking. This is what the report and especially our project experience show us. Deal makers reveal good transaction performances; they know how to approach integrations and what the major pitfalls are. However, the deal environment is rapidly evolving resulting in entirely new challenges and ways how to accomplish integrations successfully. So, never rest in developing and enhancing your integration approach, activities, methods and tools to achieve integration excellence. Below we summarise nine issues you should always keep in mind and question yourself if you have addressed them correctly during your integration(s). People 1. Involve your employees in the integration process and keep them updated during the entire time of change. 2. Ensure a high key employee retention and employee satisfaction. Value 4. Impel your integration value by focusing on the success factors that matter most to your individual transaction. 5. Apply customised integration approaches for different business processes. Risk 7. Align your integration strategy and choose sound guiding principles. 8. Constantly monitor your integration progress even after returning to daily business. 3. Establish a structured change management process. 6. Actively manage the synergy process from due diligence to post-closing. 9. Install efficient metrics and key performance indicators to measure your integration performance. 32 Making Deals Successful

33 Contacts Contacts Thomas Menzler Partner Tel.: Christian Knechtel Partner Tel.: Uwe Väth Partner Tel.: Authors Michael Dornauer, Thomas Menzler and Tim Claßen About us Our clients face diverse challenges, strive to put new ideas into practice and seek expert advice. They turn to us for comprehensive support and practical solutions that deliver maximum value. Whether for a global player, a family business or a public institution, we leverage all of our assets: experience, industry knowledge, high standards of quality, commitment to innovation and the resources of our expert network in 157 countries. Building a trusting and cooperative relationship with our clients is particularly important to us the better we know and understand our clients needs, the more effectively we can support them. PwC. 9,300 dedicated people at 28 locations billion in turnover. The leading auditing and consulting firm in Germany. Making Deals Successful 33

34 Making Deals Successful Published by PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft By Michael Dornauer, Thomas Menzler and Tim Claßen February 2014, 36 pages, 25 figures, softcover This material may not be reproduced in any form, copied onto microfilm, or saved and edited in any digital medium without the express permission of the publisher. This publication is intended to be a resource for our clients, and the information therein was correct to the best of the authors knowledge at the time of publication. Before making any decision or taking any action, you should consult the sources or contacts listed here. The opinions reflected are those of the authors. February 2014 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, which is a member firm of PricewaterhouseCoopers International Limited (PwCIL). Each member firm of PwCIL is a separate and independent legal entity.

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