The growth strategy for a company often contemplates the possibility of inorganic growth, through acquisition and/or merger with another company that is operating in the same sector. With this kind of operation, the aim is to increase market segments, positioning and capacities rapidly, objectives which through organic growth itself would either not be achievable or could require many years to achieve.
As any other sort of investment, the decision to carry out this type of acquisition and the amount to be paid for it is dependent on expectations of future return on investment that contribute to creating value for shareholders. The return on such investment is usually defined by the expected future cash flows, estimated on the basis of initial assumptions regarding the future development of both income and costs.
In processes of acquisition and merger with another company acting in the same market, the value of the transaction is not only determined by the expected future flows of the business acquired and considered individually, but also depends significantly on the additional value expected to be obtained from the synergies that can be achieved through the combined management and integration of the acquired business in the future.
For this reason, a large proportion of merger and acquisition operations are inspired by and based on the possibility of achieving these synergies once the acquired business has been integrated. Synergies can derive from both revenue (increased revenue from market leadership, new markets and products, customers, etc.) and costs (closure of a plant or part of the production lines, improved negotiation capacity in purchase processes, centralisation of administrative functions, reduction of distribution channels and sales teams, etc.).
Considering this, for this type of operation to be as successful as expected, and therefore contributing to the creation of value, it is essential that from the first stages of analysis of the transaction the work is focused on identifying and assessing the impact of synergies. In addition, after the closing of the transaction, it is extremely essential that an effective integration process is carried out in order to materialise all these synergies as quickly as possible.
In fact, a large part of the value of M&A transactions is effectively damaged as a result of the management of the transaction itself, as the specific steps to be followed to capture all the synergies from the day after the purchase have not been properly planned or executed.
Therefore, given its relevance to the transaction, the integration process must be planned thoroughly from the early stages of a deal. As part of this planning it is necessary to establish a process to identify, quantify, capture and monitor synergies, involving in this process the managers who will participate in the future management of the company or business acquired. Likewise, a timetable must be established with clear objectives and those responsible for their execution, covering both the phases before and after the closing of the transaction.
Due diligence plays a fundamental role throughout this process, the main objective of which is to provide relevant information on the target company that will at all times guide the investor in its decision to invest and at what price and under what conditions.
The due diligence process focuses on analysing all those aspects that affect the value of the transaction, evaluating the company and its ability to generate future profits and being, in turn, a vital tool to support the investor in the negotiation process with the seller. As part of this objective, in the transactions mentioned previously, in which part of the future value depends on the synergies obtained, an important part of the due diligence work must focus on assisting the buyer to identify and validate these synergies and on providing support for the integration process.
The large amount of information obtained and the detailed analysis of the business carried out through the due diligence process should provide relevant data for the proper identification of synergies and their valuation, as well as provide support in determine the actions to be taken during the post-transaction integration process. To cover this objective, it is recommendable that the integration and due diligence teams work together in an organised manner from the beginning, sharing as much information as possible, the analysis performed and the conclusions reached.
Therefore, the due diligence and integration processes should not be considered processes that are conducted independently, but rather are processes that must be done in a fully coordinated basis with teams working together. Adequate coordination of both processes is indispensable for a proper decision-making, facilitating faster integration, limiting or reducing future risks and increasing the probability of capturing and realizing the expected synergies, aspects which, as mentioned above, are decisive for the success or failure of an acquisition or merger.
