Successful Management of Mergers & Acquisitions: Development of a Synergy Tracking Tool for the Post Merger Integration

Table of Contents

Table of Figures

List of Abbreviations

1 Introduction
1.1 Background & Purpose
1.2 Methodology

2 Mergers & Acquisitions
2.1 Definition and Distinction of Mergers & Acquisitions
2.2 Selected Types of Mergers & Acquisitions
2.2.1 Strategic Alignment Approach
2.2.2 Attitude Approach
2.2.3 Regional Approach
2.3 The M&A Process
2.3.1 The Pre Merger Phase
2.3.2 The Transaction Phase
2.3.3 The Post Merger Integration Phase

3 Synergies in Mergers & Acquisitions
3.1 Definitions and Distinctions of Synergy Terms
3.2 Typical Synergy Potentials in Mergers & Acquisitions
3.2.1 Functional specific Synergy Potentials
3.2.2 Financial specific Synergy Potentials
3.2.3 Management specific Synergy Potentials
3.3 Synergy Pitfalls
3.4 The Connection between Synergies and the Price Premium in M&A

4 Synergy Management and Synergy Tracking in the M&A Process
4.1 Fundamentals of Synergy Management and Synergy Tracking
4.2 Requirements on Synergy Tracking during M&A Projects
4.2.1 Identification of Synergy Potentials
4.2.2 Quantification of Synergy Potentials
4.2.3 Planning of Synergy Potentials and Realization Measures
4.2.4 Monitoring and Reporting
4.4 Challenges for Synergy Tracking during Mergers & Acquisitions
4.5 Risk Factor Human Capital in Mergers & Acquisitions
4.6 Institutional Integration of Synergy Tracking

5 Valuation of Synergy Potentials in Mergers & Acquisitions
5.1 Company Valuation as a Framework for Synergy Valuation
5.2 Discounted Cash Flow Analysis
5.2.1 Fundamentals
5.2.2 Periodic Net-Synergy Cash Flows
5.2.3 Calculation of Discount Rates for Synergy Valuation
5.2.4 Assessment of Discounted Cash Flow Analysis
5.3 Consideration of Synergy Realization Probabilities

6 Synergy Tracking Tool for Post Merger Integration
6.1 Introduction
6.2 Structure
6.2.1 Single Business Plan
6.2.2 Synergy Action Plan
6.2.3 Merged Business Plan
6.2.4 Synergy Business Plan
6.3 Allocation of Synergy Effects
6.4 Variance Analysis
6.5 Application Example: NewCo

7 Summary and Future Perspectives

Bibliography

Appendix

Table of Figures

Figure 1: Critical Factors of Success in Mergers and Acquisitions

Figure 2: The M&A Process

Figure 3: Step Model of Subjective Company Valuation

Figure 4: The Synergy Realization Process

Figure 5: Synergy Potentials within the Value Chain

Figure 6: Systematization of Operational Synergy Tracking

Figure 7: Elements of Synergy Tracking

Figure 8: Exemplary Draft of an Action Plan for Synergy Tracking

Figure 9: Calculation Scheme of DCF Analysis for Company Valuation

Figure 10: Calculation of Net-Synergy Cash Flows with the Indirect Method

Figure 11: Tracking Tool: Single Business Plan/Income Statement NewCo

Figure 12: Tracking Tool: Single Business Plan/Income Statement Company B

Figure 13: Tracking Tool: Single Business Plan/Combined Income Statement

Figure 14: Tracking Tool: Synergy Action Plan

Figure 15: Tracking Tool: Synergy Business Plan/Income Statement

Figure 16: Tracking Tool: Variance Analysis/Shared Services/Administration

Figure 17: Tracking Tool: Variance Analysis/Sales & Marketing

Figure 18: Tracking Tool: Reporting Sheet

List of Abbreviations

illustration not visible in this excerpt

1 Introduction

1.1 Background & Purpose

In Business Development, Mergers & Acquisitions (M&A) have become an increasingly attractive growth opportunity among companies over a long period of time. Nowadays, there is hardly a day where current developments of ongoing M&A transactions or speculations about presumed M&A deals cannot be followed in the daily press. Other external growth opportunities, such as strategic alliances, joint ventures, and franchising (inorganic growth) are still behind M&A as a strategic alternative. Organic growth, which can be achieved by increasing sales personnel, developing new products or expanding in new geographical areas, presents another alternative. Nonetheless, M&A are often preferred because they provide a faster way to enter new markets and to make operations more efficient.^[1] Moreover, the constantly increasing global competition, strengthened through lowered market entry barriers and trade enhancing conventions between several countries, contribute to an increased consolidation pressure among businesses.^[2]

However, it turned out that M&A are fairly sensitive projects that are vulnerable to fail. It is proved that a huge number of M&A did not deliver on their promises.^[3] The majority of failed M&A are a result of mismanagement during the Post Merger Integration (PMI) when processes have to be adjusted, personnel need to be teamed up and corporate cultures have to be reconciled.^[4] The importance of the PMI within M&A transactions was determined during a survey among leading managers by the consulting firm AT Kearney (See Figure 1):

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Figure 1: Critical Factors of Success in Mergers and Acquisitions

During the PMI, synergies, as the dominant motive for M&A, which are identified before the transaction, have to be realized.^[5] However, synergies can frequently not be realized due to a poor quality of information, a high level of complexity or bad implementation strategies.^[6] In spite of these difficulties, many companies have not established a well-functioning synergy management and synergy tracking in their organizational structures yet.^[7]

This study deals predominantly with aspects of synergy management whereby the main focus is on synergy tracking as a support function of the synergy management. An emphasis is on the analysis of realization efforts that need to be done by the management during the PMI. To provide a solution and ease the aforementioned issues of synergy realization, a synergy tracking tool, which serves as an effective support instrument during the PMI is developed.

1.2 Methodology

The introductory part of this study is followed by the theoretical framework that comprises chapter two and three. In the second chapter, fundamentals and principles of M&A science are analyzed in order to provide the reader with necessary background knowledge in topics of M&A. It follows an introduction of synergies, as the value driver in M&A, in chapter three. In addition, different types of synergy potentials in M&A transactions are defined and synergy risks are discussed. The body of this study includes the three subsequent chapters. In Chapter four the general necessity of synergy management and synergy tracking within M&A is explained and a distinction between these functions is made. Furthermore, the tasks of synergy tracking are described in detail and challenges which have to be coped with while synergy tracking are addressed. In order to provide a comprehensive understanding of the synergy tracking tool, the valuation of synergy potentials is the main topic in chapter five. In this context the Discounted Cash-Flow analysis (DCF), as the dominant method of company valuation as well as the valuation of synergy potentials, is discussed. The synergy tracking tool is presented in chapter six. After the description of the structure, certain features required to fulfill the tracking tasks are explained. The study ends with a summary of the main aspects of synergy management and future perspectives for the M&A market.

2 Mergers & Acquisitions

2.1 Definition and Distinction of Mergers & Acquisitions

The term M&A, which refers to Mergers & Acquisitions, comes originally from the Anglo-Saxon language and has not been commonly defined yet. Overall, it includes all processes that deal with the sale or the purchase of companies or parts of companies whereas the change of the ownership structure is considered as the main characteristic.^[8]

An acquisition is defined as a purchase of a company, a part of a company, majority- or minority ownership. A merger on the other hand is a consolidation of two or more independent companies whereby at least one part loses its autonomy.^[9] Hence, M&A have to be differentiated from strategic cooperations, such as joint ventures and strategic alliances that are characterized by contracts between the parties involved.^[10] In addition, cooperation agreements are time-limited while M&A are rather considered to be long-lasting.^[11] However, this distinction is called into question since the activity of financial investors that aim for quick profits by investing in companies, such as Private Equity firms, has increased on the M&A market.

Several criteria are used to classify M&A transactions. In the following, the criteria are chosen based on their particular impact on synergies in M&A.

2.2 Selected Types of Mergers & Acquisitions

2.2.1 Strategic Alignment Approach

M&A transactions can be divided into horizontal, vertical, and conglomerate M&A. A horizontal M&A refers to a transaction which takes place between companies within the same industry that operate on the same value-added step.^[12] A popular example for a horizontal M&A transaction is the merger between the auto manufacturer Daimler and Chrysler in the year 1998. The main motives of these M&A transactions are often to increase market share, to improve the competitiveness by acquiring direct competitors or realize cost synergies, such as economies of scale and scope.^[13] Companies involved in a vertical M&A also share the same industry, but operate on different steps of the value chain. Motives for this type of M&A are often to extend the vertical integration within the value chain or to discard dependences on supplier or customer.^[14] As last type within the strategic alignment approach, conglomerate M&A are to be addressed. These are transactions which take place between entities that do not compete on the same market. Conglomerate M&A provide businesses with the option to have instant access to new markets. Companies engaged in this type of M&A transaction search for new business opportunities on new markets or try to lower their operational risk by diversification.^[15]

2.2.2 Attitude Approach

Most of this study assumes that the target company is interested in the buyer`s offer and is a willing participant in the acquisition process (friendly takeover). However, a considerable portion of M&A transactions are events in which not only the ownership structure is affected, but also the management of the target company is replaced and changes in leadership style and business strategies are enforced by the acquirer. Therefore, resistance on the side of the target company can often be experienced. The management tries to avert the M&A approach for instance by implementing “poisen pills”^[16] or by encouraging other companies to enter a bid competition in order to force up the deal value. These so called hostile or unfriendly takeovers cause often particular difficulties in the synergy management process since important information about the acquisition target are not provided and have to be gathered from public sources.^[17]

2.2.3 Regional Approach

M&A have become increasingly international during the last years. This increase is a result of major economic forces which have been pushed forward, such as the European Union’s single market, the globalization of the marketplace and the increasing global competition. Many companies realized that they need to go global in order to maintain a competitive edge. This development has resulted in a significant increase of cross-border M&A over the last years.^[18] However, cross-border M&A compared to domestic M&A are particularly exposed by the risk of failure. This has mainly to do with the high degree of complexity that has to be dealt with when M&A are conducted and synergies are due to be created. Companies involved in these transactions have to manage issues, such as cultural differences, different business laws, and varying market regulations.^[19] Therefore, international M&A projects need to be carefully planned and systematically conducted to a particular extent.^[20]

2.3 The M&A Process

Generally it can be said that M&A transactions fulfill all characteristics of a project, which are the uniqueness of the goal, time limitation, complexity, shortage of resources, and strategic importance.^[21] M&A transactions are complex projects in which many different parties and people are involved and need to contribute in order to achieve the proposed outcome. Therefore, most M&A transactions follow a similar pattern and go through a typical series of actions.^[22] According to most scientific literature this process is divided into three main phases, even though there are also sources that follow a multi-phase model.^[23] In the following, the M&A process is described based on the three phase model from the acquiring company`s point of view (See Figure 2):

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Figure 2: The M&A Process

Selected actions are described that have to be taken during the respective phases to ensure a successful M&A transaction and to give an overview over the main tasks during an M&A process. A complete and detailed analysis of all steps that are shown on the graph cannot be provided in this study. Hence, the description is limited on the core content of the actions shown on the chart.

2.3.1 The Pre Merger Phase

During the pre merger phase the basic strategy has to be determined and strategic goals need to be defined. At the same time, other alternatives, such as internal growth strategies are to be analyzed and compared with the proposed M&A strategy. This is fundamental to decide whether external growth creates the most value for the company and should be done before every M&A proposal.^[24]

After the decision for an M&A was made and the management defined common strategic goals, the acquirer searches for the ideal partner to accomplish the strategic objectives. Before the management conducts the strategic screening for possible candidates, it creates a company profile which incorporates all required characteristics that the target company has to possess. The so-called Long List includes all interesting companies that might be approached. These companies are later evaluated by means of their strategic, cultural, and financial fit to the acquiring company, which then leads to a more comprised list (Short List). The strategic screening of potential M&A partner prevents integration since fundamental problems emerging later in the M&A process can be foreseen.^[25]

The first contact to the selected companies takes place during the pre-selection process . At this stage, the potential target companies are approached in order to assess their willingness of an M&A transaction. Moreover, further information about the potential acquisition targets is gathered and used as additional selection criteria.^[26]

Within the planning phase, the management has to agree on the legal form of the new organization and need to decide how the target company is to integrate in the organizational structure. In addition, the general transaction structure, if asset or share deal, and its financing have to be clarified.^[27] Moreover, responsibilities for the further M&A process have to be assigned and decision power among these people has to be determined.^[28]

An initial company analysis is done during the simulation phase. The future developments of the company on stand-alone basis as well as of the combined companies after the merger are evaluated. This analysis helps to identify actions that are required to optimize the M&A process. In addition, synergy potentials are initially analyzed so that the management can obtain a first overview of the possible advantages and negative effects in case of an M&A transaction.

A first estimation of the target company`s value is done during the pre-merger valuation phase. Although at this time only little information to calculate a reliable value of the target company is available, it gives an idea about the expected amount to invest. Thus, it helps when decisions about the financing of the transaction are to be made and enables to approach potential investors at an early stage.

Moreover, core areas that need to be particularly investigated during the Due Diligence can be de determined.^[29]

At the end of the pre merger phase contracts, such as the Non-Disclosure Agreement (NDA) and the Letter of intent (LoI), have to be signed.^[30] The NDA engages the contracting parties to treat all information which is provided during the M&A transaction confidentially and prevents misuse by third parties. A LoI is a non-binding summary about the general outlines of an M&A transaction and underlines the parties` interest in the M&A proposal. Therefore, conceptual issues, such as misinterpretations and other factors that can expose the M&A proposal in the ongoing process can be avoided on either side.^[31]

2.3.2 The Transaction Phase

The transaction phase of the M&A process begins with the Due Diligence (DD) of the target company. The DD is a complex investigation of the target company`s current situation in which core aspects for the valuation of the acquisition target are analyzed to gain essential company information. Based on the results of the DD a realistic estimation of the target company`s value can be made. At this stage, the vendor provides the acquirer with all information that is required to evaluate the target company, thus the DD helps to estimate synergy potentials, which result from the merger, and to assess risks involved in the transaction. In addition, it helps the acquirer to derive a price range for negotiations about the final deal value.^[32] A traditional DD incorporates three fields of investigation: financial, tax, and legal DD. However; this approach falls to short in ensuring a successful M&A transaction since it fails to consider potential issues during the PMI, such as “employee resistance”. Therefore, aspects concerning human capital should also be part of the DD.^[33] An in-depth DD significantly increases the likelihood of success in M&A, because it creates a foundation to identify synergy potentials.^[34]

The Due Diligence builds then the information source for the pre-closing-integration-plan. Moreover, actions required to realize synergy potentials are specified and part of in this plan. These actions have to be allocated to their respective departments to engage people with these tasks. Furthermore, the actions must be scheduled and milestones for integration projects of the PMI are to define. To ensure a manageable integration process and enable support functions like synergy tracking, synergy potentials have to be quantified.^[35]

The actual valuation of the acquisition target takes place during the subsequent valuation phase. All knowledge about the acquisition target gained during the DD provides important input for this process, which can now be conducted based on a sufficient information basis. It has to be noted, that the result of this valuation represents only the so-called subjective value of the acquiring party’s point of view and not the final deal value.^[36] Essentially, it presents the maximum price which the acquirer would pay for the acquisition target.^[37]

Several methods to value a company exist.^[38] In this study the Discounted Cash Flow analysis (DCF) is applied as the most used method in practice.^[39] The first step by valuing the acquisition target is to calculate the Stand-alone value which is the company value assumed that the acquisition target would continue to operate as it did before. Afterwards, restructuring potentials that would arise from an M&A transaction, such as the disposal of redundant asset and the estimated synergy value, are added.^[40] Eventually, value decreasing effects, such as dysergies and integration costs have to be subtracted (See Figure 3):

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Figure 3: Step Model of Subjective Company Valuation

From the chart above, it can be concludeded that the final deal value is set within the negotiating range to an amount that both parties finally agree on. The exceeding amount of the Stand-alone value that has to be paid is called the price premium.^[41] In order to add value through the M&A transaction, the Present Value (PV) of the net-synergy effects has to be higher than the price premium. Thus, it can be concluded that the identified synergies justify the price premium. ^[42] Likewise, it makes demands for the synergy management to realize synergies at least to the amount of the price premium to prevent value destruction after the transaction.^[43]

The valuation is regularly done by both sides and results in different prices due to different objectives of the parties involved. In particular, differences concerning the valuation of restructuring potentials and synergy values can often be noticed.^[44]

When both parties choose to continue with the M&A transaction after the valuation and potentials resulting from the merger are disclosed, they enter into the negotiation phase. The final deal value depends often on factors such as, market power, and negotiating skills of the parties involved^[45]

After both parties agreed on a deal value, contracts must be signed as an official purchase agreement (Signing). In addition, implementation contracts that include additional agreements relating warranties and underwriting terms that were given by the parties during the process have to be signed.^[46]

The transaction phase ends with the closing after approvals from public authorities, such as the Antitrust Division, were given.^[47]

2.3.3 The Post Merger Integration Phase

The Post Merger Integration (PMI) has a huge impact on the success of M&A transactions.^[48] In this phase previously planned synergies, which were calculated in the deal value, have to be realized in order to achieve the initial goals.^[49] Although the PMI is often seen as the final phase of the M&A process, important tasks, such as personnel integration and target tracking, have to set in at earlier stages to ensure a successful integration process. Gerds & Schewe suggest a separate “Merger DD” to overcome risks, such as “employee resistance” and poor-quality information, which cause problems during the PMI.^[50] Therefore, PMI is sometimes also seen as a cross-sectional phase of the M&A process.^[51]

To make sure that all necessary actions are taken to meet the initial goals, a Post Merger Integration plan has to be created. In this plan the required tasks are timed and assigned to the persons in charge in order to keep the process manageable.^[52] It builds on the pre-merger integration plan and can be seen as an extension of this under improved conditions and a higher level of detail.

During the organizational integration, all operations, which were earlier done separately, need to be combined.^[53] The degree of integration and the pace in which the integration process is conducted are influential factors in this phase. Despite the pursuit of a short integration process in many businesses, problems caused by overloaded employees must be considered. Hence, it is important to adjust the pace of integration to the abilities of the workforce.^[54] The legal integration as another task of the PMI refers to obligations, such as requesting the record in the company register for the newly formed business.^[55]

During the personnel implementation, the management has often to deal with issues, such as job insecurity among employees and the refusal to adapt to new corporate cultures.^[56] For this reason, it is necessary to incorporate incentive systems to keep employees motivated and to ease their apprehensions.^[57]

Target tracking within the PMI comprises actions, such as synergy management and synergy tracking. The main task is to monitor business processes and make adjustments in order to realize synergy effects. At the same time, measures in respect of human capital such as, monitoring the development of the workforce to prevent losses of key employees are to be induced.^[58]

Finally, structural adjustments due to the M&A transaction should be addressed in this context . These adjustments are required if it turns out that the integrated entity do not contribute to the firm`s strategy after all. These restructuring measures are often not done until a few years after the merger when it became evident that strategic goals cannot be achieved.^[59]

3 Synergies in Mergers & Acquisitions

3.1 Definitions and Distinctions of Synergy Terms

In order to avoid misinterpretation the term synergy which is often misinterpreted is defined in this chapter. In addition, a transition from the general term to synergies in the M&A context is made. The term synergy derives its origin from the word “synergo” which can be split into the two components “syn” (together) and ergo (work).^[60] Discussions and debates about synergies in the business context often refer to Ansoff`s synergy concept that he developed in contribution of science in corporate strategy. He describes positive synergies as the “2+2 = 5” effect which means that companies are able to add value while combining its product-market posture.^[61] Nowadays, synergy is frequently used as a comprehensive term that embraces positive synergies and negative synergies which are also called dysergies.

Positive synergies in the business context are defined as “synchronic interactions of previously independent companies, subsidiaries or functional departments, which lead to an increase of the company value.” Dysergies, on the contrary, are defined as “synchronic interactions of previously separated companies, subsidiaries or functional departments, which lead to a decrease of the company value.”^[62]

In the following, the term synergy is used comprehensively and refers to positive as well as negative synergies.

Another important distinction has to be made between the terms synergy effect and synergy potential. As synergy potential can be seen the economic effect which is expected when the separate entities are operating as one unit. Whereas the synergy effect describes the actual outcome after the synergy potential had been realized. This can be either a beneficial effect or a negative effect resulting from the M&A transaction. The following figure visualized these differences (See Figure 4):

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Figure 4: The Synergy Realization Process

3.2 Typical Synergy Potentials in Mergers & Acquisitions

Business science provides a variety of systematization methods for synergies.^[63] In the following, synergies are categorized into functional, financial, and management synergies. This approach comprises the majority of synergy potentials and provides a structured overview.^[64] It is paramount for the synergy management that synergy potentials are quantifiable; hence, Sirower describes synergies appropriately as “real, measurable improvements in competitive advantage.”^[65]

3.2.1 Functional specific Synergy Potentials

As functional specific synergy potentials can be described a synergy potential which can be precisely assigned to a certain functional department in an organization. Basically synergy potentials which are attained through an M&A transaction can be identified in every functional department of an organization, even though the myth that synergies exist only in back-office areas enjoys still popularity.^[66] Indeed, it is not denied that synergy potentials in back-office areas, such as administration, accounting, and IT-departments can be obtained. However, most of them are entirely focused on cost reduction, such as job consolidation. Although, revenue-enhancing synergy potentials create often several alternatives to benefit from M&A.^[67] As an example, an increase in revenues that results from cross-selling by the two firms after the merger. These cross-selling effects arise for instance when additional products from one company can be sold because of existing customer relations from the other company.^[68] Further synergy potentials that can be assigned to this category are the economies of scale and economies of scope that are achieved in the production department. Economies of scale describe the effect when unit costs can be decreased due to an output increase which results in lower overhead costs per product.^[69] Economies of scope on the other hand are cost reductions that are related to the product variety of companies. Cost savings may result from simultaneous production of several different products in a single business, as contrasted with their production in isolation, each by its own specialized firm. An example would be the platform production within the automobile industry where same parts can be used for assembling of different types of cars.^[70] The following figure provides an overview of synergy potentials within the functional departments of an organization by combination of production factors (See Figure 5):

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Figure 5: Synergy Potentials within the Value Chain

3.2.2 Financial specific Synergy Potentials

In scientific literature financial synergies often play a minor part compared to the aforementioned synergy potentials. This is because they normally do not have to be realized under great effort as other synergies and do not cause comparable problems.^[71] Mostly financial synergies are a consequence of the increase of the company size of the acquirer after the M&A transaction.^[72] Yet, they can have a big impact on the acquiring business. Consequently, they need to be mentioned in this context. Financial synergies are distinct since they can result in two forms which are either higher cash flows or a lower the cost of capital.^[73] A merger of two firms for instance results in a higher degree of creditworthiness when an emerging company which has credit constraints merges with a company with a high equity ratio and a high creditworthiness.^[74] As a result, financing becomes cheaper and the cost of capital decreases. Another example would be the decrease of operational risk caused by non-perfectly correlated revenues of the involved companies. This can be the case when companies acquire complementary business segments after the merger. As a result the expected return on debt and equity decreases, and therefore the cost of capital (Co-insurance effect).^[75] Also tax benefits as a special form of financial synergies belong to this category. These effects can arise either from the acquisition taking advantage of tax laws to write up the target company’s assets or from the use of net operating losses to offset income. Thus, a profitable business which acquires a loss making firm may be able to use the net operating losses of the latter to ease its tax burden. Alternatively, a company that is able to increase its depreciation charges after an M&A transaction can save in taxes and shelter income (depreciation tax shield).^[76]

3.2.3 Management specific Synergy Potentials

At this point the management synergy potentials as the last group of synergy potentials shall be addressed. Like the financial synergies, management synergies are able to have an impact on the entire acquiring company.^[77] This can be achieved through the transfer of human capital. For instance managers with high potential and outstanding skills can be employed and bring positive effects into the newly-formed company. This can lead to an increase of productivity within the workforce as enhanced leadership style motivates employees and results in performance improvements. On the other hand, the number of highly-paid management positions can often also be reduced which then leads to a decrease in labor costs.^[78] Management synergy potentials can sometimes cause problems in particular when synergies are to be quantified in order to calculate the company value. Therefore, scoring models, such as the well-known balanced scorecard are often used to make qualitative synergies measurable.^[79]

3.3 Synergy Pitfalls

M&A have been an established strategic option of business development for a long time. Consequently, managers of acquisitive businesses should have experience to manage these processes appropriately. Nonetheless, often they are not able to deliver synergies to the projected extent and do not achieve an M&A success. This can have several reasons. The three most mentioned synergy pitfalls are addressed in the following.^[80] Synergy potentials tend to be overestimated. This is often the result of estimated synergy values by the management. Often manager fail to analyze synergy potentials in detail and do not consider their characteristics appropriately. Factors, such as the realization probability and the duration of synergies are often neglected.^[81] Moreover, synergies are often planned top-down by the management which often leads to unrealistic assumptions that cannot be fulfilled by the people in charge.^[82]. Another reason for a poor synergy realization effort is bad integration management. Common mistakes in this regard are insufficient project planning or an excessive pace of integration which can lead to dissatisfaction within the workforce and evoke employee resistance.^[83] These dysergies and other integration costs are often neglected and hamper the synergy realization in eventual stages of the M&A process.^[84]

3.4 The Connection between Synergies and the Price Premium in M&A

One of the most important tasks within M&A transactions is the valuation of the target company. The projected deal value of an M&A transaction is a crucial factor which determines whether external growth compared to other strategic options presents the most beneficial alternative in order to achieve strategic goals, such as the increase of the company value.^[85]

In M&A transactions it has to be differentiated between the calculated company value and the final deal value. The reason for this deviation is because of the transaction partners and their different interests in the transaction. The vendor aims to get the maximum price for his/her company while the acquirer tries to achieve a price discount by applying risk surcharges and negotiating a low price premium to benefit from the transaction. Moreover, opinions about the allocation of synergies differ between the transaction parties. This means synergies are seen to be paid by the acquirer, whereby the acquirer expects to participate in their realization without paying for them. Regarding to this it is said that cost synergies, whose realization depends not on a particular acquirer (universal synergy effects), should generally be part of the price premium and should be paid by the acquirer. Whereas synergies, which can only be realized by a small group of companies, should only be calculated in the acquirer`s subjective value of the acquisition target and should thereby create a real synergy potential (real synergy effects).^[86] Nevertheless, the final deal value is always an outcome of a market process in which different expectations are matched through price negotiations. Therefore factors, such as negotiation power and negotiation skills play a decisive role.^[87] Generally, a common value in an M&A transaction does not exist since it always depends on which party of interest the respective value is calculated.^[88]

In M&A Transactions, synergies are often the most influential value drivers. The synergy value has at least to cover the price premium in order to avoid value destruction.^[89] The higher the price premium, the more synergies have to be realized by the acquirer in order to obtain a positive Net Present Value (NPV). Consequently, the acquirer`s economic break-even in which the risk-adjusted price premium is just compensated by the transaction can be determined as follows:^[90]

Deal Value = Stand-alone value + Net synergy value

It should be noted, that the price premium equals the difference between the deal value and the Stand-alone value. Hence, the break-even formula can be simplified as:

Price premium = Net synergy value

Thus, it appears that a positive NPV can only be achieved when the net synergy effects exceed the price premium paid for the acquisition target. This highlights once more the importance of an effective synergy management during the entire M&A process and stresses the risks of value destructive M&A transactions as a result of overestimated synergy potentials.

[...]

^[1] See Coenenberg; Jakoby 2000, P.178.

^[2] See Lucks; Meckl 2002, P.6-7.

^[3] See Booz Allen & Hamilton 2001.

^[4] See Gerds; Schewe 2009, P.4-6.

^[5] See Unger 2007, P.880.

^[6] See Deloitte 2009, P.8.

^[7] See Thomaschewski 2004, P.117.

^[8] See Lucks; Meckl 2002, P.23.

^[9] See Coenenberg; Jakoby 2000, P.178.

^[10] See Jansen 2001, P.110.

^[11] See Paprottka 1996, P.8.

^[12] See Fischer 2008, P.18.

^[13] See Wirtz 2003, P.18.

^[14] See Paprottka 1996, P.11-12.

^[15] See Wirtz 2003, P.19.

^[16] See DePamphilis 2009, P.106.

^[17] See Weber; Roventa 2006, P.281.

^[18] See Lucks; Meckl 2002, P.3-5.

^[19] See Fischer 2008, P.20-21.

^[20] See Lucks; Meckl 2002, P.252-267.

^[21] See Sodeik 2009, P.47.

^[22] See Fischer 2008, P.34-35.

^[23] See Gerds 2000, P.12.

^[24] See Lucks; Meckl 2002, P.55, 74.

^[25] See Fischer 2008, P.38; Lucks; Meckl 2002, P.79-86.

^[26] See Lucks; Meckl 2002, P.87-88.

^[27] Further reading about transaction structures provides: Wirtz 2003, P.257-258.

^[28] See Lucks; Meckl 2002, P.97-107.

^[29] See Borowicz et al. 2006, P.169.

^[30] See Ibid.; Picot 2008, P.159-162.

^[31] See Bragg 2008, P.10-13, 83-85.

^[32] See Picot 2008, P.166.

^[33] See Deloitte 2009, P.12; Chapter 4.5.

^[34] See Weber; Roventa 2006, P.281.

^[35] See Lucks; Meckl 2002, P.111-117; Chapter 4.2.

^[36] See Lucks; Meckl 2002, P.175-176.

^[37] See Wirtz 2003, P.202-203.

^[38] See Lucks; Meckl 2002, P.177.

^[39] See chapter 5.2 for a detailed analysis.

^[40] Further reading relating the controversial discussion about the general distinction of restructuring potentials and synergy effects: See Metz 2002, P.60.

^[41] See Thomaschewski 2004, P.99.

^[42] See Ibid.; Chapter 3.4.

^[43] See Biberacher 2003, P.369-371.

^[44] See Lucks; Meckl 2002, P.190.

^[45] See Lucks; Meckl 2002, P.191; Wirtz 2003, P.256.

^[46] See Lucks; Meckl 2002, P.118-119.

^[47] See Ibid.

^[48] See Picot 2008, P.23.

^[49] See Jansen 2001, P.227.

^[50] See Gerds; Schewe 2009, P.122-130.

^[51] See Jansen 2001, P.227.

^[52] See Lucks; Meckl 2002, P.218.

^[53] See Gerds 2000, P.51.

^[54] See Deloitte 2009, P.17.

^[55] See Lucks; Meckl 2002, P.129.

^[56] See Larsson 2005, P.189-190; Chapter 4.5.

^[57] See Lucks; Meckl 2002, P.141.

^[58] See Ibid., P.154, 220.

^[59] See Ibid., P.130.

^[60] See Goold; Campbell 1998, P.133.

^[61] See Ansoff 1965, P.72.

^[62] See Biberacher 2003, P.53.

^[63] See Ansoff 1965, P.75-76; Paprottka 1996, P.77-88; Beck 2003, P.676-680; Bruner 2004, P.327-332.

^[64] See Thomaschewski 2004, P.17.

^[65] See Bruner 2004, P.325.

^[66] See Weber; Roventa 2006, P.281.

^[67] See Bruner 2004, P.328.

^[68] See Fischer 2008, P.30; Another example provide: Lechner; Meyer 2003, P.368-369.

^[69] See Jansen 2001, P.74-75; Deimel; Isemann; Müller 2006, P.69.

^[70] See Jansen 2001, P.74.

^[71] See Biberacher 2003, P.65.

^[72] See Gildemeister 2008, P.20.

^[73] See Damodaran 2005, P.4.

^[74] See Beck 2003, P.679.

^[75] See Wöginger 2004, P.206.

^[76] See Biberacher 2003, P.65-67; Bruner 2004, P.328-329.

^[77] See Thomaschewski 2004, P.17.

^[78] See Beck 2003, P.679.

^[79] See Reinke 1996, P.46-47.

^[80] See Picot 2008, P.25; Beck 2003, P.680.

^[81] See Unger 2005, P.887; Lechner; Meyer 2003, P.369-370.

^[82] See Wöginger 2004, P.205; Weber; Roventa 2006, P.281.

^[83] See Deloitte 2009; Gerds; Schewe 2009, P.70-88; Chapter 4.5.

^[84] See Beck 2003, P.680.

^[85] See Lucks; Meckl 2002, P.171-173.

^[86] See Gildemeister 2008, P.60.

^[87] See Thomaschewski 2004, P.97; Gildemeister 2008, P.59-60; Wala 2008, P.61; Eckhoff 2006, P.199.

^[88] See Coenenberg; Jakoby 2000, P.185.

^[89] See Lucks; Meckl 2002, P.186.

^[90] See Thomaschewski 2004, P.99.