Mergers and acquisitions have become more costly than they have been in the last quarter century, spurred in part by companies’ slow organic growth, the need to add digital capabilities and an abundance of cheap funding, said the report.
Buyers’ gain from mergers and acquisitions in terms of cost saving on account of synergies (projected financial benefits accruing by combining two companies) is getting reduced as such deals are getting more and more expensive, a Boston Consulting Group report has noted. Mergers and acquisitions have become more costly than they have been in the last quarter century, spurred in part by companies’ slow organic growth, the need to add digital capabilities and an abundance of cheap funding, said the report.
Historically, buyers have kept two-thirds of the value of expected synergies—their reward for bearing the risk and responsibility for realising them after closing. “But today, buyers are keeping less than half of the synergy potential, with the remainder going to their targets’ shareholders through the price premium,” the report pointed out. Jens Kengelbach, BCG senior partner and head of the firm’s global transaction centre, who also happens to be the co-author of the report, points out that the synergies that buyers project and announce have increased every year since 2013. As a result, investors are becoming more skeptical about companies’ ability to deliver on these bolder promises, he observed.
An important point highligthed by Kengelbach is that acquisitions are more expensive today than at any time since at least 1990, and buyers need to give away a higher share of the total value of expected synergies in order to strike a deal. The report is based on a dataset of more than 600,000 M&A deals going back to 1990.
Report coauthor and BCG principal Georg Keienburg stated that in an environment, where buyers need to argue for higher takeover prices via higher synergies while also giving away a higher portion of the synergies upfront to target shareholders, acquirers must redouble their efforts to ensure what they are promising is really achievable–and convince the market of that.
“Buyers’ internal decision makers—including the management team, the board, and the investment committee —should be wary of high synergy estimates, and scrutinize them,” Keienburg said. The BCG report recommended that buyers double down on quantifying and truly ‘hard-wiring’ the synergies, since they are now often the “make-or-break” element of the case in a competitive auction process.