BCG: Synergy Sharing in M&A Crucial for Value Creation
Research by Boston Consulting Group shows that in successful mergers and acquisitions, both buyers and sellers share in the generated synergies. Sellers capture an average of 31 percent of expected synergies, enabling value creation for both parties.
Approximately two-thirds of mergers and acquisitions among public companies destroy value for the acquirer in the short term, despite significant synergy opportunities. However, a notable minority of these deals successfully create value for owners of both companies, according to research by The Boston Consulting Group (BCG) and the Technische Universität München (TUM).
The key to successful value creation in acquisitions lies in the sharing of synergies between the buyer and the seller. BCG's research indicates that sellers, on average, capture 31 percent of the capitalized value of expected synergies. This occurs because sellers anticipate the buyer's ability to realize synergies and demand a takeover premium that reflects this enhanced value proposition.
Synergies can stem from various sources, including cost efficiencies like eliminating redundant operations, achieving economies of scale in purchasing, or centralizing administrative functions. Revenue-enhancing synergies are also possible. The potential for such synergies varies greatly by industry. Highly regulated sectors, such as transportation and telecommunications, may have limited opportunities to realize full synergy potential due to regulatory constraints.
Industries undergoing significant international consolidation, like mining, chemicals, and healthcare, often present substantial synergy opportunities. Particularly in pharmaceuticals, smaller companies can dramatically increase their value by merging with larger organizations that possess the necessary manufacturing and distribution capabilities to navigate global market entry barriers.
BCG and TUM have developed analytical methods to quantify the relationship between synergies and acquisition premiums. This approach helps companies assess deal viability and ensure that the transaction price leaves adequate room for value creation for the acquirer's shareholders.