![]() ![]() In other words, they aimed high, but not high enough to put them on even footing. Like most merging companies, these companies announced higher synergies than would have been expected from scale benefits alone-but we learned that even their overestimated synergies wouldn’t have been enough to close the cost gap to competitors. We also wanted to examine the incremental benefits of M&A on companies whose cost structures had lagged industry norms before the merger. We found that across most industries we analyzed, on average 70% of companies announced higher synergy estimates than would be expected just by companies getting bigger (see Figure 3). We then looked at mergers and compared announced synergies with what would be expected based on our cost curves. For example, telecom companies, with their fixed-cost infrastructure, show the most benefit, while retailers, with their distributed costs, show the least.īy comparing the predicted margins for two standalone businesses with the margins for a single entity of their combined size, we estimated the scale synergies they could achieve by merging (see Figure 2). As expected, larger companies typically have lower costs as a percentage of revenues, and the benefits of scale differ significantly by industry. We created cost curves for each industry, which showed the margins achieved for companies based on their size and industry. Bain recently analyzed data collected from SAP and FactSet Research Systems on the performance of more than 22,000 companies across a range of industries and geographies and spanning from the smallest public companies to those as large as $100 billion in revenues. To answer these questions, we embarked on an extensive M&A research effort. Are scale benefits alone justifying announced synergies? Are companies using due diligence and integration planning to improve underlying performance and reduce overlapping costs? We wanted to see whether merging companies’ announcements matched the synergies that should be expected given their industry, size and initial cost position. We took a hard look at synergies in M&A to understand what the best companies do when estimating, announcing and pursuing them. For example, if two $100 million companies merge, they rarely know what the resulting cost structure will look like based on their industry’s existing $200 million companies. They typically make broad estimates based on prior deal announcements, without considering whether the cost structure of the combined entity is realistic based on benchmarks of like-sized companies. Most merging companies entering a deal don’t have a clear understanding of the level of synergies they can expect through increased scale. But new Bain analysis comparing deal announcements with the performance of more than 22,000 companies across a range of industries has unveiled another, even more fundamental contributor to the rampant overestimation. One of the causes of this overestimation is well known: Companies set aggressive targets to justify a deal price to financers. In a Bain & Company survey of 352 global executives, overestimating synergies was the second most common reason for disappointing deal outcomes (see Figure 1). The open secret about M&A is that most deals fail to generate the synergies companies expect when they announce a merger. ![]()
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