Academic research has repeatedly confirmed that about two-thirds of all mergers and acquisitions among public companies destroy value for the acquirer, at least in the short term. Even when acquirers justify deals by pointing out the ample synergy opportunities that they offer, capital markets remain skeptical. Yet a significant minority of acquisitions do manage to create value for the owners of both the acquirer and the target, demonstrating that despite the doubters in the capital markets, the overriding M&A rationale—value creation—remains valid.
Of course, the specific path to value creation varies widely by company, depending on the economics of its business, its valuation in the marketplace, and the terms of any given M&A transaction. But whether by buying out-of-favor targets near their cyclical lows, realizing cost efficiencies, or boosting the top line through organic growth, acquirers and M&A partners can create value—provided the transaction is accurately priced and specific value-creation strategies are executed effectively.
Most acquirers seek to create value by capturing cost synergies. But there is more to value creation than simply identifying synergies and executing strategies to realize those synergies. The Boston Consulting Group teamed up with the Technische Universität München (TUM) to compile new research demonstrating that in successful deals, buyers and sellers share the synergies. Acquirers cannot expect to capture 100 percent of those synergies for themselves; sellers will anticipate the buyers’ synergies and demand takeover premiums, reasoning that the target is worth more in the hands of the acquirers than in their own. Our research suggests that sellers collect, on average, 31 percent of the average capitalized value of expected synergies. However, in practice, the seller’s share varies widely.
Potential synergies may include closing redundant plants or production lines, realizing economies of scale in purchasing, centralizing administrative functions, reducing headcount, or pushing forward other forms of streamlining. Not every acquisition has synergistic potential, however. In regulated industries such as transportation, utilities, and telecommunications, for example, there are sometimes few synergies available—even though they often operate as part of “natural monopolies” that, in theory, have high potential for synergies. Companies in such industries tend to be influenced and constrained by national regulators that generally bar them from realizing all available synergies for the benefit of the end consumer, and thus the net value of any synergies disclosed at the time of a merger announcement is relatively low.
Industries with a high ongoing level of international consolidation, on the other hand, can generate significant synergies, ranging from 2 to 10 percent of the target company’s latest annual sales (a median of 4.8 percent), or 1 to 3 percent of the combined sales of target and acquirer (a median of 1.5 percent). (See Exhibit 1.) Among the industries with ample opportunities for realizing synergies are mining and chemicals, which have experienced a wave of global consolidation in recent years, and health care, especially early-stage pharmaceutical companies that can dramatically increase value by joining forces with large organizations that have the manufacturing and distribution clout needed to overcome the lofty barriers to international market entry.
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