Post-Merger Value Creation: Five Imperatives For Safeguarding Shareholder Value & Overcoming The Winner’s Curse – Shareholders

Research shows that many mergers and acquisitions (M&A)
fail, i.e., do not increase shareholder value. The main
reason is that those acquisitions do not fully realize anticipated
synergies, which have been planned to back-up paid acquisition
premiums. In turn, this then leads to the infamous
‘Winner’s Curse’, which states that the successful
acquirer in a transaction typically wins the bid because he uses
the most optimistic, and typically overoptimistic, estimate of the
value of his investment.

At the same time, M&A is a key enabler for corporate
development not only in buy-and-build contexts but also for
companies in more stable settings. As a result, it is not
surprising that M&A activity has increased in the last decade.

We see five key focus areas for successful post-merger
integration (PMI) to overcome this dilemma and safeguard
shareholder value:

• Value creation – Put at the heart of the M&A
  lifecycle:
  
  It might sound obvious, but value creation needs to be placed in
  the center of the entire M&A process. Specifically, the
  pre-deal outside-in synergy assessment needs to be followed by a
  thorough due diligence in this area and a post-signing
  validation / execution preparation, which is then concluded by the
  implementation after the closing of the transaction. Especially
  when it comes to “strategic deals” this straight-forward
  PMI value creation pathway is regularly disturbed by
  business-as-usual operations and the complexity of the buyer
  organization, putting synergy realization at risk.




• Right ambition level – Balance top-down push and
  bottom-up validation:
  
  Successful integrations that create value start with ambitious yet
  achievable top-down targets. Those targets should be based on
  sufficient background information through experience-based pre-deal
  outside-in synergy assessments and verified to the extent possible
  during the due diligence process. As a next step, top-down targets
  need to be substantiated by bottom-up validation to ensure both
  sustainability of measures and buy-in of the organization during a
  later implementation.




• Implementation focus – Leverage post-signing
  phase for preparation:
  
  The length of the period between signing and closing depends on
  various factors such as deal complexity and the resolution of
  potential anti-trust issues. At the same time, this period is best
  used by validating and operationalizing pre-deal outside-in synergy
  plans (obviously taking any anti-trust restrictions into account).
  Here it is not about concepts and PowerPoint slides but rather
  concrete action plans and the setup of project/implementation
  teams. For instance, when headcount-related cost synergies are a
  major lever, it makes sense to start designing a fit-for-purpose
  target organization and leadership structure already before the
  closing of the transaction to be able to jumpstart more detailed
  organization discussions and headcount optimizations shortly after
  Day 1.




• Less is more – Set the right
  priorities:
  
  That M&A deals are complex endeavors is
  obvious, and it holds especially true in the post-merger
  integration phase. Therefore, keeping the focus on the right things
  at the right time and keep sight of the big picture is key for
  leaders. Experience shows that a proper prioritization is best
  achieved by challenging every planned activity via two main
  questions:




• • Is this activity critical for Day 1 readiness or for business
    continuity after Day 1?

  
  

  • Is this activity a prerequisite for synergy realization




• If at least one of those questions is
  answered with “yes”, the respective activity should be
  put on the agenda of the Integration Management Office (IMO). If
  not, there is no reason to put an additional burden on an already
  stretched organization, so the topic should better be parked until
  the initial high-pressure PMI phase is completed (e.g., after Day
  90). The recommendation is to install a small but experienced IMO
  to allow exactly this prioritization to happen in a meaningful
  way.




• Pace & employee-centricity over perfection –
  Move fast and put people in the center:
  
  The above-mentioned implementation focus helps also to move as
  quickly as possible once the deal is closed. Leaders need to keep
  in mind that M&A activities generate a high degree of
  uncertainty and anxiety within both the buyer and target
  organization’s employees and customers. At the same time,
  employees need to be understood as key enabler of a successful PMI.
  Therefore, the clear recommendation is to make decisions as quick
  as reasonably possible and to set up a professional communication
  process that keeps key stakeholders up to date with the right
  information consistently delivered at the right time.

The list above focuses on PMI-relevant factors and therefore
needs to be enriched with pre-deal value capture levers such as
optimized signing/closing conditions, SPA mechanism, price
negotiations and potential exit/divesture strategies to realize the
full value potential. As M&A situations vary and each synergy
case is different, there is not THE ONE value-creating PMI
approach. The winning formula remains experience blended with the
right level of pragmatism in execution, especially “when it
really matters”.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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