how to track revenue synergies

how to track revenue synergies
November 1, 2020

In other terms, the synergies deriving from the merger must exceed the initially lost value. By the six-month mark, four of the five newly constituted business units were not only beginning to realize savings, they were also enjoying an uptick in revenues despite an industry slowdown. It also guides, supports, and challenges the integration planning teams and provides quality control for materials that the teams provide to the integration steering committee. The CFO can also drive alignment of operational execution with the Street. Are the buyers the sort of company that is skilled at acquiring because they make new employees successful? Transformational opportunities, especially with more significant deals, are more critical even at the cost of combinational synergies. It’s common, BCG points out, for a merger due-diligence team’s scenarios “to unearth 20% or more in cost savings based on assumptions about consolidation, or to estimate more than 10% in additional revenues based on industry benchmarks or high-level assumptions about market or customer segment share.”. When they see they are hitting their targets, companies know not only that the merger is succeeding but that their assumptions were on point. Cost synergies (such as salaries saved as a result of headcount reduction and licensing fees that no longer need to be paid) are easier to account for. Synergies will be one of the objects that apprise what a company pays, but there are a host of other things. In fact, the new company realized $740 million in savings—more than double the original base estimate. This is accomplished through training on new products and customers, sales lead generation, elimination of overlap in account assignments, and new incentive systems. But companies that are disciplined about pursuing and executing synergies—to the point of disclosing them—enjoy a share price premium. By continuing to use this site, or by clicking "I agree," you consent to the use of cookies. Synergies are not effective immediately after the merger takes place. Organizations, on regular, don’t appear very comfortable setting a number associated with revenue synergies. It was no surprise when, at the six-month mark, the integration began to falter. You may withdraw your consent to cookies at any time once you have entered the website through a link in the privacy policy, which you can find at the bottom of each page on the website. Most leaders involved in mergers don’t fully appreciate the significance of setting stretch targets. But realizing the revenue synergies can be difficult. Then, it should ask integration teams to identify revenue synergies as well as concrete initiatives for achieving them. These teams address either critical cross-functional issues or opportunities (such as the customer experience) or specific critical issues (such as customer engagement or decisions from headquarters). The structure of the acquirer’s sales organization required finance to work with HR to establish new sales compensation structures, including new performance metrics. Furthermore, companies that are aspirational when they do a transaction often put too much into the transformational opportunity bucket. Linking due diligence and PMI also allows for a greater degree of ownership and accountability on the part of line managers. We just tell the line managers, ‘We expect you to build business by X percent.’ The line leaders don’t expect us to track them, as they see it as part of their business.”. Revenue Synergies‍ Revenue synergy is based on the premise that the two companies combined can … Acquirers don’t give adequate attention to capital opportunities. Finance led meetings with the commercial and supply chain teams to discuss details and developed a temporary manual workaround whereby stores received a full season’s volume of inventory and accounting adjustments were done once. Finance can facilitate cross-selling — the most common revenue synergy strategy — by supporting receipt of combined purchase orders from customers, generating combined invoices and applying commingled cash. So even before the deal closes, companies can accomplish three core integration activities: compiling a wide range of baseline data, such as customer, functional performance, and procurement data; vetting synergy targets; and preparing options for key decisions. Detailed description of the value driver(s) comprising the synergy . the synergies that will yield the highest return/increase shareholder value for the least effort. BCG recently conducted a study of 286 acquisitions in North America carried out between 2010 and 2015. The myth that 70% of all transactions fail and that M&A gives poor returns corresponding to strategic acquisitions no longer exists. By thoughtfully considering stretch targets, leaders engender a  focus on the future—a sense of challenge and creative thinking on the part of integration teams. When a team missed a milestone or experienced a shortfall, company B had the visibility it needed to troubleshoot and course-correct promptly. Four ways boards can oversee risk management beyond COVID-19, Multidisciplinary professional services organization. Recognizing these realities, successful companies ensure a well-coordinated handoff from the due diligence team to the integration planning team. It’s equally important to deconstruct and articulate the drivers of the savings at a high level. Also, note that we don't expect synergies until FY09, since the deal will probably not close until near the end of FY08. Acquirers like these have demonstrated that it is possible to deliver promised synergies consistently and systematically. Related Expertise: Integration-related revenue synergies usually get mixed in with the normal revenues of the business, which makes them harder—if not almost impossible—to distinguish. Management and bankers, eager to make the deal happen, don’t always look critically at the trajectory of the core business or the size of the stated synergies. The tracking of synergies is imperative for reporting later in the integration process – without tracking deal value can be lost and lessons cannot be learned. Synergies may arise in M&A transactions, hard and soft. Among the most common post-merger oversights, says BCG, is failing to systematically monitor progress against achieving synergies. Generally, its members have only a limited understanding of the levers that drive the synergies and the challenges involved in achieving them. Waiting for the complete integration of these various parts can delay revenue synergies for years. True integration is taking root. remember settings), Performance cookies to measure the website's performance and improve your experience, Advertising/Targeting cookies, which are set by third parties with whom we execute advertising campaigns and allow us to provide you with advertisements relevant to you,  Social media cookies, which allow you to share the content on this website on social media like Facebook and Twitter. how will the synergy actually be captured?). They analyze synergy opportunities and develop options, recommendations, and plans to support the integration steering committee’s decision making. A clean team is an independent group that, with management’s guidance, collects and analyzes sensitive company data before the close. But with the help of clean teams, companies need not fly blind in planning and preparation preclose. Synergy Platform Teams. Deals that deliver the highest value to shareholders are those that not only achieve cost reduction but also amplify revenues. (For more on the study, see “The Real Deal on M&A, Synergies, and Value,” BCG article, November 2016.). This will help establish synergy targets and ranges that make later refinements possible, once more information becomes available to teams. once it integrates the acquired company. Policy. Tightly link due diligence and post-merger integration. Or, if sales postmerger declined by 10%, was it because the company didn’t realize synergies? Tracking should include a formal reconciliation process between the project view and finance or controlling view. Success is shared (because those responsible for hitting the targets had a say in setting them), so teams are motivated to stretch further. It also makes sense to involve the business unit heads—those charged with implementing the plans—in target setting at the due diligence stage. Established by legal contract, clean teams operate according to protocols agreed on by both companies’ legal departments. Consider the approach taken by a major US-based global manufacturer, whose merger promised a whopping $4 billion in announced cost savings—an amount that clearly required across-the-board cuts. In particular, buyers look for ongoing reductions in overhead and other operational costs. How did the company achieve such rapid progress? But companies plan and track revenue synergies with less rigor and transparency, largely for two reasons: they are harder to track, and leaders view revenue synergies more as part of their day-to-day business than as a distinct exercise. The companies sought to vertically integrate their supply chain channels to expand customer reach and product portfolio optimization. During due diligence, the two companies figured that their merger would save them from $300 million to $500 million in costs. In our work guiding and analyzing hundreds of postmerger integration (PMI) projects, we’ve learned what works and what doesn’t in delivering synergies—whether the synergies involve ongoing reductions in overhead, procurement, or other operating costs, or augmentation of revenues through the newly acquired customer base, new capabilities, jointly developed new products, or better price realization. In a nutshell, company B followed a disciplined, pragmatic approach to pursuing merger synergies, from identifying and validating them to creating detailed plans with built-in accountability. Many managers’ time gets consumed by a massive deal, and that is one of the principal reasons why large significant transactions, on average, underperform. These synergies are likely to relate to the balance sheet. CFOs should deploy finance teams early in the deal process to collaborate with other functions on integration planning, developing new finance processes, adjusting metrics and developing management reporting. A business case should start with the synergy estimates identified during M&A pipeline management as a part of the preliminary analysis stage. Six Essentials for Achieving Postmerger Synergies, Transformation, Turnaround & Restructuring, THE VALUE OF KEEPING INVESTORS IN THE KNOW, The Real Deal on M&A, Synergies, and Value. In sectors like tech, the competition, the industry dynamics, and other elements like that will tell the premiums paid, not the synergies. In fact, these units actually exceeded a number of synergy targets established during the deal. The above examples are among the number of critical roles finance plays to enable the harvesting of revenue synergies. Three synergy levers that are relevant to every M&A deal is cost, capital, and revenue. They derive from three sources: products and services cross-sold from one company to the customers of the other, new products or services jointly developed by the merged companies, and price and product line optimization. In the case of mergers of equals, this ends up being one of the most vital swing factors in terms of, Combinational vs. Transformational Synergies, Combinational synergies are the synergies connected in drawing two organizations together and eliminating redundancy.

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