Good integration delivers real M&A value... Or does it?

Despite 20 years in the business, this is a fair question: Yes, there’s an obvious ‘common sense’ logic to the notion that deal benefits won’t be delivered unless you have a plan. You can’t deliver the plan unless it’s executed well. You can’t achieve success unless you bring your people with you.

But the real question – certainly the one in the minds of your investors or lenders – remains central, even if not explicitly asked: How much time, effort and cash, internally or externally, should you spend to make sure the business you’re about to buy is properly integrated or improved post-close? What should be spent pre-deal to understand the post-close risks and challenges? How worthwhile is money spent on, say, cultural due diligence or leadership assessment? And beyond Day 1, how much more will you get from a programme team of 20 rather than a programme team of five? What would happen to the long-term deal outcome if we spent just a little less on those post-close projects, or if we went more slowly? In short, what is the return on my integration effort?

Of course the answer is inevitably deal-specific, and for most, the decision drivers lie in the past: Experience of failed (or successful) integrations, times when taking that extra step made all the difference, or perhaps made no difference at all. We at BTD are the first to talk about integration being an experience-based discipline rather than a skills-based one, but when everyone’s experience and their outcomes are so varied, any convergence around ‘best practice’ leads to anodyne platitudes: Culture is critical. Communications is key. Plan ahead. Manage risks. All absolutely true. All largely unhelpful.

So, let’s try looking at this from a different angle. The point of any integration efforts – assessments, due diligence, design, planning, programme management, whatever – is to protect, de-risk and accelerate delivery of your ‘best case’ scenario for deal benefits. We have learned that the most important impact that ‘good integration practice’ has is on the last of these, its ability to accelerate benefit delivery. Pre-close design and planning for integration help get people focused and started on value creation immediately after Day 1. Rigorous programme management helps ensure the biggest creators of deal value are tackled head-on, while clear accountabilities help leaders prioritise integration alongside their BAU roles.

But can we really quantify the return on your integration efforts? No one would be comfortable categorically promising that a cultural due diligence exercise will increase deal benefits by 50% (despite, interestingly, everyone religiously insisting that cultural alignment is critical to delivery of said benefit!). You can however draw on some of the thinking behind risk vs. return analysis (feel free to dive more deeply into Sharpe or Treynor Ratios if you believe it would help, but beware the rabbit hole!). To keep it simple, let’s consider some figures:

• Acquisition synergies £10m/year from year 2 (assuming a £200m acquisition; typical synergies sought are between 2% and 10% of a target company’s annual revenue¹Boston Consulting Group, 2013)
• Total Synergies over a 3-year Business Case: £20m (non-discounted, excluding integration costs)
• 3-month delay in synergy delivery: -£2.5m (12.5% of the Business Case)
• 10% reduction in synergy delivery: -£2.0m (um, 10% of the Business Case! But keep reading)

The average acquirer struggles to deliver around a quarter of the intended deal benefits, and usually does so six months later than needed. This equates to over 2% of the target’s annual revenue usually left on the table by the end of year 3, plus a further 1% every year thereafter. Not profit. Not synergies. Revenue.

This is cash lost to the business, and it’s usually cumulative, reflecting the ‘death by a thousand cuts’ most integrations experience. “Oh, we got most of what we wanted, even if it cost a little more and took a little longer” may sound like success, but it very quickly adds up to a loss of over a quarter of your M&A business case. Sometimes much more.

So – while still requiring a level of experienced judgement – a better question emerges: How much impact do you believe that integration activity (say, due diligence or early, improved planning) would have on the timing of your deal benefits? While formulating your answer, a few interesting points to consider:

• The long-term average premium paid for an acquisition – that is, the amount most commonly paid over and above the target’s stand-alone value – is 6%²Boston Consulting Group, 2019.
• According to a McKinsey survey³McKinsey, 2018, the average capture rate of revenue-based synergies was 77%. In other words, the average acquirer only delivered 77% of the revenue synergies expected - ever. (In our experience, and that of others, revenue synergies typically account for approximately 50% - 75% of the total business case.)
• The average time for acquirers to capture 80% of their synergies is 15-18 months (cost-based synergies normally taking less time to achieve), while the average for the most successful acquirers is only 12 months. High-performing acquirers deliver synergies 3-6 months ahead of their peers⁴Deloitte, 2020.

Applying these performance benchmarks to our hypothetical business case above, our ‘average’ acquirer will lose something approaching £8.0m – 40% – of a £20m acquisition synergy business case.

So before you embark on your next acquisition, you may want to ask yourself: Is our synergy case not just realistic but realistically deliverable? If not, are we overpaying for this deal? If we do this deal, are we ready and able to deliver the full benefits, not just most of them, and if not, what will it cost – in time and money – to be ready? In short: How much should I be investing to ensure I get this right? As a purely mathematical exercise, the above figures would suggest a spend of between ½ - 1% of deal value on integration to deliver a 3x to 5x value creation return.

I encourage you to spend more time, effort and cash to ensure your next integration delivers the full potential of the deal. But this encouragement is not just in our own interest, its in yours: We see organisations consistently under-estimate the importance of integration, and consistently fail to achieve the deal targets they promised their board. Adopting this mindset and approach will increase your ability to invest the right amount to protect and accelerate benefits from your next acquisition, and make better decisions on where you place that investment. You may also find – as have some of our own clients – that this approach helps you negotiate a better price for the acquisition itself, allowing you to invest properly in integration while still delivering top-tier returns on your M&A.

¹ Boston Consulting Group, 2013

² Boston Consulting Group, 2019

³ McKinsey, 2018

⁴ Deloitte, 2020