Mergers and acquisitions often set out with grand strategies to gain competitive advantage but real success hinges on the ability to create value, writes Byron Smith
While financial considerations are crucial, the best outcomes in mergers and acquisitions (M&As) often come from performing value identification due diligence, ensuring optimal resource utilisation post-deal, and leveraging the strengths each party brings to the table.
The importance of synergies
Successful M&As typically begin with a common goal, such as growth or market consolidation.
The key to success lies in identifying and leveraging synergies, optimising operations and enhancing the market position of the combined entity.
In Ireland, where the business environment includes both indigenous companies and multinational corporations (MNCs), creating value is essential for maintaining competitive advantage and achieving long-term success.
While M&As are more common between indigenous companies and MNCs, we have effectively used value-creation methodologies to enable smaller enterprises to secure an equal "seat at the table" post-deal, despite their lower financial clout.
Challenges in achieving synergies
Synergies achieved through mergers and acquisitions can be operational, financial or strategic. Ideally, a successful outcome will include all three:
- Operational synergies involve cost savings, improved efficiencies and enhanced productivity.
- Financial synergies provide better access to capital, improved cash flow and tax benefits.
- Strategic synergies expand market reach, enhance product offerings and boost innovation.
In Ireland, leveraging these synergies in sectors like technology, pharmaceuticals and financial services can significantly enhance performance.
However, achieving these synergies is challenging. Globally, our firm has found that around 70 percent of M&As fail to meet their anticipated value, underscoring the need for meticulous planning and execution.
To fully realise the potential of an M&A, companies in Ireland must navigate regulatory frameworks, market dynamics and cultural fit, and identify inherent weaknesses early in the negotiation cycle.
Innovation as a driver of value creation
We have seen that synergies are not just about matching capabilities; some of the most successful M&As involve an innovative company with limited capital partnering with a capital-rich company with minimal R&D.
Simply put – SMEs have the ideas and the MNCs have the financial resources.
Such collaborations provide the necessary resources and capabilities for research and development, leading to new products, services and technologies.
This innovation-driven approach helps companies stay ahead of the curve and maintain a competitive edge in the market.
Effective governance and risk management
Aligning governance and risk management in Irish businesses post-M&A is often challenging. The question of "What is my role now?" is typically a decision for the acquirer. The larger entity's risk and quality processes are often assumed to be superior.
If not properly aligned, however, this assumption can lead to value erosion. Larger stakeholders frequently cite agility and innovation as reasons for carve-off and merger, or for acquiring a smaller, efficient and innovative bolt-on entity.
Often, the acquired entity can feel disadvantaged by the deal experience. This can be potentially fatal, as key management may become disenchanted and line workers may feel their lifetime's work is being disregarded, often unwisely.
It is crucial to evaluate the approaches and capabilities of both parties, use peer benchmarking and develop the best strategy without power plays.
This type of analysis is essential for a successful value creation-driven M&A strategy.
Peer benchmarking: looking outside to avoid mistakes
Frequently, dealmakers overlook lessons from previous market M&A when approaching a deal. Therefore, peer benchmarking is a crucial value-creation tool.
By comparing performance metrics with industry peers, companies can identify best practices, set realistic targets and uncover areas for improvement.
This benchmarking goes beyond initial due diligence, setting early expectations for the financial, commercial and operational performance of the post-deal entity.
It ensures that the newly formed, theoretically less lean, entity remains focused on becoming more efficient and competitive to achieve its value creation goals.
Byron Smith is Associate Director of Strategy at KPMG
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