M&A: now for the hard work
There will be more fretting than usual in 2016
The M&A bankers have gone away. The completion drinks parties are a fading memory, and deal mementoes are already gathering dust. What now? Now for the hard work. It is up to the middle managers to deliver what was promised in those slick PowerPoint slides — and up to the buyer’s shareholders (and sometimes the seller’s too) to fret about whether or not the deal is working.
There will be more fretting than usual in 2016. The year just passed has notched up a record for corporate M&A, according to Dealogic, with 38,000 deals amounting to $4.9tn. This has surpassed even the $4.6tn recorded in the heady days of 2007 (albeit not in inflation-adjusted dollars). Healthcare and technology have been the busiest sectors, closely followed by finance and real estate. The top five deals alone were worth $500bn.
All of this means plenty of synergies for middle managers to deliver. Deloitte says that 2015’s deals have promised an annualised $150-200bn of cost savings. Taxed at 25 per cent and capitalised, they should be worth $1.3tn — if they are all delivered.
But synergies tend to be poorly reported by the companies that promise them. Updates on progress towards cost savings may be provided for a year or two, but beyond that point the reports dry up. Revenue synergies — a dubious source of value, but one by which many acquirers set great store — receive even less attention. This matters. A 2011 study by KPMG found that only 31 per cent of deals completed between 2007 and 2009 added value (and in the previous two years it was just 27 per cent). Yes, the period covered the financial crisis, but it is nevertheless a worryingly low number.
One of the problems with evaluating deals is that the counterfactual — the outcome had the businesses not come together — is impossible to know. But this is no excuse for the scant attention paid by companies to acquisitions that are more than a couple of years old. Shareholders are still paying for deals many years after the event. Managers need to prove those deals are working over a similar timescale.