Bain: 70% firms overstate M&A business case benefits

16 December 2014 3 min. read
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The synergy benefits of mergers and acquisitions are often overestimated, finds a report by Bain & Company in conjunction with ERP giant SAP. By creating scale curves per industry and identifying what companies outperforming their estimates do, the strategy consultancy hopes to provide better grounding for estimates and encourage best practice.

The scales of performance
Mergers and acquisitions are, in particular for multinationals, a common part of the business cycle. One of the reasons given for a merger is that by integrating strengths and the synergy of scale, the merger of two companies creates a more competitive and efficient entity within the market. Yet based on a survey held among 352 global executives, Bain & Company and SAP find that overestimating synergies is the second most common reason for disappointing deal outcomes, following an incomplete due diligence process.

Top five root causes of deal disappointsments or difficulties

One of the problems identified by the report is that businesses do not have a good grasp of the benefits and synergies that can be expected after a merger. To gain better insight into this, Bain analysed data on more than 22,000 companies across a range of industries and geographies and spanning from the smallest public companies to those as large as $100 billion in revenues, and created so-called ‘scale curves’. Setup for each industry, the scale curves show the margins achieved for companies based on their size and industry. By creating scale curves, the authors were able to identify the industries prone to overestimation, as well as zoom in on businesses that outperform the expectations, to see what they are doing right.

Precentage of deals

Learning from outperformers
The analysis reveals that on average 70% of companies overestimate the value of synergies from mergers, with banks, manufacturers and healthcare providers the poorest forecasters. There are however also outperformers – companies that either prove best practice in M&A execution or use the disruption caused by the merger to bring about wider changes within the acquired businesses, in addition to reaping the benefits of scale, by focusing on removing inefficiencies and elevating the cultural fit with strategic objectives.

The report highlights three best practices for businesses that seek to maximise the synergy benefit:

  • Begin by using the deal thesis and rigorous due diligence to pinpoint where scale synergies and best practice benefits will have the most substantial effect. According to Bain, in 90% of successful deals, an acquirer’s management team had developed a clear investment thesis early on.
  • In areas that will deliver the most value, use benchmarks and the industry-specific scale curve to understand the starting and desired end points, and in addition compare them with competitors. 
  • Be deliberate when choosing to use M&A to gain cost benefits beyond scale improvements, and be realistic about internal capabilities. Winning companies distinguish between areas they are primarily integrating and those they are optimising beyond pure scale benefits. Being selective about to optimise is key.