Buyers are spending hundreds of millions of dollars each year on due diligence, and synergy estimates in deals have set record highs every year since 2013. Synergy estimation must be getting better, right? Maybe, but there’s still a healthy dose of work to be done. Most dealmakers and executives can recall at least one instance in which estimates missed the mark—and the impending U.S. economic downturn means the chances of failure in the near future will only increase.
What, then, makes synergy capture so elusive? Pointing to a single cause can be reductive. But in our experience navigating hundreds of mergers, we’ve observed two overarching trends:
To address these trends, dealmakers should throw out their traditional integration management office (IMO) approach and adopt a new model: the value management office (VMO).
In essence, the VMO is a “re-districting” of integration work that prioritizes cross-functional efforts that create real value rather than arbitrary functional teams that can be as distracting as they are helpful.
Considering the macroeconomic conditions, it’s our belief that extracting synergy from acquisitions will be even more critical as the tailwinds of the past decade begin to wane.
Synergy estimates have been getting rosier over the last decade. One reason? Relatively cheap financing and covenant-lite terms created a seller’s market in which buyers likely had to pad their bids in order to stand out. This was already observable in 2020, but the COVID-19 pandemic exacerbated the situation further. Diligence was pushed largely into the virtual arena, further limiting buyers’ ability to perform the unmeasurable yet critical human element of the process.
But now the oracles are foretelling a graver picture: The Fed has already communicated the highest single rate hike since 1994. Money isn’t quite as cheap, and lenders will likely turn less confident about synergy estimates. Buyers will want to have assurances that their estimates will be realized.
Historically easy money has also provided minimal incentive to rethink outdated approaches. The IMO model, which organizes the integration teams around departmental designations (e.g., finance, HR, ops, sales), may be ideal for tackling must-dos within departments such as purchase accounting or legal entity consolidation, but it fails to provide the holistic perspective needed for cross-departmental collaboration—and it’s these cross-functional teams that typically drive the real value.
There are exceptions to every rule. Many client teams deliver synergy despite using an outdated M&A model. But in our experience, these teams rely on exceptional leaders who emphasize collaboration and have a top-down view of the end-to-end value chain—the entire set of processes through which a company delivers a final product.
In other words, they’ve been taking a more VMO approach without knowing it.
With these two pain points in full effect, it’s no wonder that deals often fail to live up to their hype. To ensure better accountability and smarter execution in this fast-changing environment, consider a unique value management office (VMO) approach to post-merger integration—one which reprioritizes opportunities for synergy and builds cross-functional teams to seize them.
By obtaining a more accurate measure of expected synergy, and by improving post-merger value delivery, the VMO can help organizations reach synergy targets more frequently and obtain faster time to value. Here’s how it works.
The temptation is high to get started right away with integration: New leaders are eager to prove themselves, and there’s ample case-study evidence that a lack of communication about the future drives more customer and employee attrition compared with being more proactive. But charging ahead before being able to clearly articulate to the team where and when the value will come from—and how much is expected—can cause at least as much churn.
Management teams should instead make a brief announcement to stakeholders while they take a few weeks to revisit assumptions from diligence and re-run the analysis with actual data compared to the limited data available in diligence.
Each deal is different, but we’ve found a P&L view of the business is the optimal way to organize the effort. Below are some illustrative topics to get your arms around upfront:
With this important discussion complete, you’re now in a position to build a structure tailored to the value opportunities for the specific transaction. The result is an integration program that has only as much administrative overhead as it needs, reliable financial targets based on real data, and accountable owners empowered to achieve those targets. Each synergy should be mapped directly to the P&L for transparent and objective monitoring of progress in execution.
The VMO does not have a standard execution model; it adapts to reflect the needs of the synergy opportunities in each transaction. Still, there are some items that will need to be performed as a matter of course. The integration teams generally break down into three different buckets, and different departments may have different representation across some or all of the following:
The elevated role of synergy teams enables greater real-time visibility to synergy capture. Traditional IMO reporting and oversight focuses on “stoplight” level status updates from all functions on a weekly basis. Again, this is useful for understanding what’s happening in a single department but is not well suited to communicate progress toward synergy.
The VMO model, on the other hand, specifically outlines the line on the P&L where value is expected to accrue, making reporting a built-in part of the month end close process. The existence of the numbers on the dashboard drive ownership and accountability for completion since they’re part of the regular reporting scope of the VMO.
Ultimately, a VMO model is based on integration—not unlike an IMO model—but is centered around driving value rather than merely integrating functions. This re-alignment enables the double benefit of a streamlined administrative workload (no more teams for the sake of having them) and greater visibility to actual synergy capture. Team members will find themselves in fewer and more important meetings, and management gets the data it needs and wants on a regular basis.
Opportunities are not only vetted for assumptions and limited data, but opportunities to expand or augment them with digital capabilities are also possible. This maximizes the ability to hit synergy targets but also opens the door for incremental upside on top of the base case model.