Post-Merger Value Creation: Five imperatives for safeguarding shareholder value & overcoming the winner’s curse

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”.