Building Synergy in M&A – It’s the difference that makes a difference
“Crisis? What crisis?”
“So what are the synergies you’re after?” He looked back at us blankly – this was one of those tumbleweed moments – we’d asked a question to which there was no answer. We were there to help the M&A “manager” for a global player who had just acquired a company for a 10 figure sum which – according to the manager – was four times the capital value. “We’ve not been told about any synergies… just to integrate the two companies and drive out costs.” I didn’t even ask how you can cut anything enough to save more than three times its value. There didn’t seem much point.
I think this story has within it many of the elements of why M&A is so problematic at the level of strategy, and of execution. The statistics on the failure of M&A are dismal and since it’s usually intended as a strategic move and over $2 trillion is spent on it annually, this represents a failure of corporate strategy on an epic scale.
Whilst it’s easy to categorise the failure of M&A as either a failure of strategy or a failure of execution, at the core of them both, there is a common thread.
M&A is supposed to increase shareholder value. There are two ways M&A can do this. The first is to cut costs whilst still delivering equivalent value. The second is to deliver more value from combining the merged companies than they had whilst apart. This 1+1=3 effect is synergy – the ability to do something together that the two companies couldn’t do apart. Strategically, these approaches are diametrically opposed.
Synergy is about doing something extra, something new, something different: “if we take your product X and run that through our channels into these markets we’ll have a value proposition that neither of us had alone” That’s synergy and strategically its an expansionist move. Cost cutting on the other hand is simply about doing what we were already doing, but doing it cheaper through economies of scale. Strategically this is a defensive move – it doesn’t propel us into new markets, it doesn’t offer any new value proposition. The two approaches represent very different strategies.
Unfortunately, they often get confused. Partly this is because M&A practitioners tend to treat them both identically. Although synergy is fundamental to the theory of M&A, there is no standard way of modelling it. There is lots of methodology on how to value companies for M&A, but very little on how to value synergies and the confusion between cost cutting and synergy may be enough to explain most of the failure of M&A at a strategic level. When synergy and cost cutting get mixed up, the strategic intention of the M&A can be misunderstood by those charged with delivery – “We’ve not been told about any synergies”, then the M&A can be conceived as an expansionist move but executed as a defensive one trying to cut costs through standardising to a single operating model – a disconnect of strategic intent. Also, because cost cutting appears a faster way to recoup an inflated purchase price (inflated to take into account assumed synergies) cost cutting tends to take priority and synergies get abandoned.
When it comes to execution, there are many things that can go wrong, but at the back of some of the most common we have observed is also something to do with synergy. Synergy depends on difference. It comes from combining different things, different capabilities and it’s in exploiting the differences between the two companies that the opportunities for synergy lie. Synergy is about the difference that can make the difference.
In several cases where the intention was to exploit differences to create synergy, the differences were destroyed in the post-M&A integration. In an IT M&A, the target was bought for their specialist knowledge and dominance of a prestige niche for specialist gaming PCs. Forced to use the same supply chain as the acquiring company in the interests of “simplicity”, it became impossible to maintain the distinctive quality on which their market position was based. The difference – and the synergy that could have been built upon it – were lost and the target became just another overpriced acquisition forced into the same mould as the acquirer. All the skills, knowledge and expertise of the target company’s staff that had been sourced and nurtured so carefully and paid for so expensively were thrown away in a drive to harmonise.
In some case it may be because of the drive to recoup costs quickly, that differences are driven out. Cost cutting often means the elimination of difference and again and again this means the destruction of the very uniqueness that made the target attractive in the first place. Sometimes it’s simply a more general failure by managers to understand the value that difference brings to businesses and a failure to understand how to turn the difference into profit. Managers are trained to see standardising as the obvious way to create value. Building synergy from differences is a rarely taught or understood skill. Of course one of the easiest assets to lose and the least visible is human capital and this is an area where difference can simply be seen as eccentricity, refusal to conform or resistance. For the M&A manager who couldn’t answer “So what are the synergies you’re after?”, standardising processes and people to fit the acquirer’s model was the only approach available – any differences were just a nuisance.
When you look at the way the M&A industry deals with – or fails to deal with that elusive and creative essence of M&A – synergy, is it any wonder that the failure rate is so high?