How To Find If a Merger is Successful?
Discovering the success rate of the merger is easy if you take its purpose or desirable outcome into account. This purpose provides you with some key points to compare with, later. On that basis, you can find the accurate answer to if the merger is successful. However, the reasons for the merger are multiple and different. It means that every acquisition is done to achieve a unique milestone. And, an acquisition is no less than an uphill battle. You need to fight with all legalities, especially during valuation, due diligence, etc.
But first, it’s really important to discover specific goals associated with any merger and acquisition (M&A) deal. Then come some technical terms, phases of mergers and acquisitions, or anything that can help you measure the success to a certain extent, but not fully. These can be the IRR, which is the internal rate of returns, ROI (return on investment), and WACC (which is the weighted average cost of capital).
Another noteworthy thing is that these financial metrics can scan the success when the necessary steps for integration were not carried out properly and completely before its closure.
Role of Synergies
Before diving deep, it’s good to understand synergy. When the combined value and performance of two entities are greater than that of the sum of the separate individual entity, it is called synergy. Simply put, it’s a financial benefit that a company expects from a merger or acquisition. Achieving corporate synergy is possible if companies consistently interact with one another. With this frequent communication, additional value can be achieved. You can see these benefits in operations and financial value.
This term is overwhelmingly used in mergers and acquisitions (M&A). The buying company expects to have something specific from the deal. If these specifics are achieved, the opportunity is seen as converted.
Majorly, the benefits of synergies are visible in these fields:
- Low churn rate
- Outnumbering customers
- Lesser customer acquisition cost
- Reduced average cost per customer
- Spike in the average revenue per customer
- Scrolled up the average cross-sell or up-sell per customer
Measuring the achievements before closing the deal is always good. It allows the acquiring company to track various KPIs and their success or failure rate within in a given timeframe.
They reveal the degree of attractiveness of the deal, either upfront as part of a due diligence exercise or when evaluating the ultimate success of the merger. A synergy curve shows the journey of synergies over time, and it tells a thousand stories.
Introduction to The Synergy Curve
The synergy curve defines the degree of attractiveness of a merger. The success of deals can be measured upfront during the due diligence exercise or at the end. The synergy curve defines the journey of synergies over time. It involves the monitoring of monetary gains, which certainly require a period to show up. That’s why it takes months of strategic planning, preparation, and execution. The integrated strategies define the shape of the curve and the time taken for deliveries. In addition, it also reveals the potential of an aligned team.
The board and stakeholders of the company examine this curve. They witness the vision and defined efforts that are put in to achieve success.
If you talk about the benefits of this curve prior to the acquisition, it helps in understanding the logic behind every strategy. This understanding sets up the stage to maximize synergy. In all, this curve can help you set up a benchmark, plan, and measure the synergy delivery rate if you use it during integration.
It’s obvious if you define and project it clearly, measuring it would be lightning-fast. So, you need to thoroughly assess prior to the deal. Later upon the deal, you may refine it if required.
However, there are several online platforms like Bankers Deals, Eknow, Devensoft, etc. are there to make it speedy to attract opportunities for a deal. Almost every merger attracts opportunities to maximize synergies, even if the deal is recently closed. The stakeholders often think about the difference, which can be related to the workforce, shareholders, suppliers, and customers. That’s why the C-suite executives negotiate and show commitment to making things better for them. Simply put, stakeholders are more interested in getting benefits out of that deal.
If your synergy curve is time-specific, the delivery can be on-time and, hence, valuable. The CEO, then, easily monitor, compare, and analyze the outcome.
If the opportunities are not projected, the chance to achieve synergies fades away.
What if you did not define any synergies? Certainly, you cannot track the result because it was not even thought about before. However, you may track it later. But, it would be good for nothing because you did not plan before. So, there is no base to compare the success rate. There is another way to calculate it, which is through the IRR or ROI.
What if you have another option? Hypotheses can help you define the delivery of synergy.
You may set metrics like these:
- Churn rate
- Number of customers
- Average upgrade rate
- Customer acquisition cost
- Average cost per customer
- The average revenue per customer, etc.
In essence, you may create a simple business model. Come up with two models, which should be based on pre-deal and post-deal. Think about independent drivers, which can be the following
- Fixed costs
- Variable costs
- Number of customers
Benefits of Synergies
The financial benefits inspire companies to merge marketing efforts and resources to achieve greater visibility. This is how both companies can achieve branding goals via greater visibility. With synergies, companies can benefit from strategic partnerships, which encourage more supply and the ability to reach the maximum target audiences. This is how any entity can generate more revenue. Synergized entities have an edge, as investors quickly provide funds, perceiving that the merger would bring a cutting edge. In addition, the workforce will jointly work and increase productivity. Likewise, there are some other advantages that synergies provide.
An acquisition or merger can be successful if its synergies are predefined properly. It gives an idea about the goal and to what extent one has achieved it. Just a positive IRR or ROI is not sufficient. What actually benefits is pre-merger planning. So, always think about integrating projections.