Most buyers routinely overvalue the synergies to be had from acquisitions. They should learn from experience. It´s known as the winner´s curse. When companies merge, most of the shareholder value created is likely to go not to the buyer bur to the seller. Indeed, on average, the buyer pays the seller all of the value generated by a merger, in the form of a premium of from 10 to 35 percent of the target company´s preannouncement market value. The fact is well established, but the reasons for it are less clear. Our exploration of postmerger integration efforts points to the main source of the winner´s curse: the fact that average acquirer materially overestimates the synergies a merger will yield. These synergies can come from economies of scale and scope, best practice, the sharing of capabilities and opportunities, and, often, the simulating effect of the combination on the individual companies. However, it takes only a very small degree of error in estimating these values to cause an acquisition effort to stumble. Acquirers must undoubtedly cope with an acute lack of information. To help them assess synergies and set targets, they usually have little data about the target company, limited access to its managers, suppliers, channel partners, and customers, and insufficient experience. Even highly seasones buyers rarely capture data systematically enough to improve their estimates for the next deal. And external transaction advisers – usually investment banks – are seldom involved in the kind of detailed, buttom-up estimation of synergies that would be needed to develop meaningful benchmark before a deal. Fewer still get involved in the post-merger work, when premerger estimates come face-to-face with reality. Lessons learned
To address this change, we have used our extensive experience of postmerger integration efforts across a range of industries, geographies, and deal types to set up a database of estimated and realized merger synergies. After combing though the data from 160 mergers (so far) – as well as our knowledge of the companies and their industries –we have found six practical measures that executives can take to improve the change of achieving synergies from acquisitions. For starters, executives should cast a gimlet eye over estimates of top-line synergies, which we often found to be inflated. They should also try to anticipate common “dis-synergies” (such as the loss of costumers and difficulties reconciling different service terms) and consider raising their estimates of onetime cost. Additional steps include vetting assumptions about pricing and market share, making better use of benchmarks to deliver cost savings, and forming more realistic assessments of how long it will take to capture synergies. When applied an acquisition team chose for its expertise and its ability to counter gaps in information, these sin measures should help buyers avoid the winner´s curse and improve the quality of most of their deals. Reduce top-line synergy estimates
Wall Street wisdom warns against paying for revenue synergies, and in this case it is right. The greatest errors in estimation appear on the revenue side –which is particularly unfortunate, since revenue synergies from the basis of the strategic rationales for entire classes of deals, such as those pursed to again access to a target´s customers, channel, and geographies. Almost 70 percent of the mergers in our database failed to achieve the synergies excepted in this area (exhibit I). Acknowledge revenue dis-synergies
Another common reason for error in estimating revenues is the failure of most acquirers to account explicitly for the revenue dis-synergies that befall merging companies. These dis-synergies sometimes result from the disruption of a company´s ability to execute and sometimes directly from efforst to reduce cost. In retail banking, for example, important cost-based synergies are expected to come from consolidating branch...