Capturing M&A Synergies Value in Today’s Active M&A Market
With the economy booming, stock valuations on the rise and excess cash in corporate coffers due to last year’s tax cuts, M&A activity is really starting to heat up. There was $2.5 trillion in M&A activity during the first half 2018 alone, which set a new record.
Unfortunately for acquirers, acquisition multiples are soaring along with M&A activity, according to new research recently released by The Boston Consulting Group (BCG). In 2017, the median acquisition multiple was 14.2, which was 4.6 percent higher than it was the year before. Since 2009, this number has increased about 5 percent a year. What’s more, the average estimate of the percentage of M&A synergies value applied to M&As is now up to 2.1 percent of combined sales, or nearly double the 1.1 percent of combined sales it was in 2011.
Skepticism Abounds Among Investors
Given these increasing multiples, many investors are growing skeptical of the ability of companies to deliver on the high M&A synergies value they announce. CFOs share the responsibility, along with CEOs, of uncovering, evaluating and realizing the synergies initially sought in the transaction.
In fact, capturing the full anticipated M&A synergies value in an acquisition is one of the biggest challenges faced by many CFOs today. Synergies in an M&A transaction usually include things like:
- Cost savings through elimination of duplicate resources.
- Generation of new revenue streams.
- Lower operating expenses due to improved processes and use of technology.
The BCG report points out that synergies have traditionally been used to augment the case for an acquisition. In the current environment, however, synergies have moved to “center stage, becoming the make-or-break element of the buy-side case.”
Evolution of CFOs’ Responsibility
While it’s usually the CEO’s responsibility to lay out the business strategy and ensure the success of an executed M&A event, the CFO’s responsibility is growing and evolving. CFOs need to use integration planning and synergy management tools as they work closely with CEOs and other executive managers to realize M&A synergies value. Companies may face a series of potential negative impacts when CFOs fail to do so, including the following:
- Overpaying for an acquisition.
- Investor skepticism of the company’s ability to produce announced synergies.
- A negative impact on shareholder value.
To avoid these negative impacts, acquirers need to establish a strategic vision that executes pre-determined and communicated synergistic objectives. This vision should focus on revenue synergies by using cross-selling, adding distribution and revamping pricing strategies; cost synergies by reducing procurement, cost of goods sold and general and administrative expenses; and balance sheet synergies by reducing inventory, improving financing terms and improving capital allocation.
Realizing M&A Synergies Value
Your company could realize a number of positive outcomes when your CEO and CFO work closely together to devise a strategy to realize M&A synergies value, including the following:
- Enhanced shareholder value.
- Higher growth and improved productivity.
- Lower operating expenses.
- The creation of new revenue streams.
- Improved processes through enhanced technology.
M&A activity is really starting to heat up, with $2.5 trillion in M&A activity during the first half 2018 alone. Unfortunately for acquirers, acquisition multiples are soring along with M&A activity, which has left many investors skeptical of the ability of companies to deliver on the high M&A synergies value they announce. CFOs share the responsibility of uncovering, evaluating and realizing the synergies initially sought in M&A transactions. An outsourced CFO services provider can help you realize M&A synergies value when executing transactions in today’s white-hot M&A market.
John W. Braine, Partner, CFO Edge, LLC