Monday, December 3, 2012

Synergies and Anticipating the Competition

  Today's post continues the discussion of the 14 Keys to Acquisition Success that we posted in early September.  We are actually combining points five through nine in that earlier post.

5.   Beware of unrealistic projections.  Understand the source of synergies.  Why are these synergies available to you and not other buyers?

6.     Beware the winners curse – you win the auction not because you are the smartest, but because – you paid the highest price.

7.     Most deals fail to reach their full potential because of issues in integration. Don’t underestimate the costs and problems of integration.

8.     In mergers, 2+2 can equal 5, (3 is also a distinct possibility)!

9.     Think strategically, but understand that your competition is doing the same.

Mergers can be wonderful opportunities for value creation through synergies.  But synergies can also be negative (point 8).  When that happens it is usually because of unrealistic projections on the front end, inadequate due diligence, or poor integration (point 7).  Destruction of value also occurs when bidders overpay and Joe and I have warned repeatedly about hubris and the winner's curse (point 6).  That is, you 'won' the deal not because it creates value but because - you paid the most for it.  And given a world of smart, competitive bidders, this likely means you won not because you were smarter than the other bright lights in the room, but simply because you were willing to pay the most.  

But synergies do occur and mergers on average, create wealth for the target shareholders and even for the combination of target/bidder shareholders.  So how do you know where to look for synergies and how do you avoid overestimation?  The key is to look for your own sustainable, competitive advantage.  What is it that your company can do better than anyone else in the near future?  The point about the near future gets at the sustainable part.  Having a sustainable advantage in the long run, is of course, even better - but in the long run, most strategies and abilities can be copied or learned or acquired.

So we have to continually ask ourselves:  where do these synergies come from?  And, at least as important - why is no one else able to achieve the same synergies?  What is it that makes them unique between our firm and the firm we are acquiring.  Remember that if the synergies were not unique to our firm, it is likely that other firms would be bidding as well.

Finally, and related to all of the above - think strategically.  It is simply not good enough to anticipate your next moves or acquisitions assuming that the status quo in your industry is maintained.  There is a tendency to project our cash flows assuming our competitors are not also anticipating and adapting to the future.  So think strategically, but understand that your competition is doing the same (point 9).

All the best,

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