Deloitte Survey Finds Integration a Key Factor in M&A Deal Success

Close to one-third of respondents said their efforts fell short of success

Mar 04, 2015, 08:00 ET from Deloitte

NEW YORK, March 4, 2015 /PRNewswire/ -- According to the findings of Deloitte's Integration Report 2015, a poll of 800 U.S. executives, almost 30 percent of respondents said their integration efforts fell short of success. Moreover, almost one in five (18 percent) of executives surveyed reported their integration failed to reach initial synergy targets.

The Integration Report 2015's findings highlight that M&A can be fraught with challenges and risks, but also present opportunities; these insights are particularly relevant as deal activity continues to proliferate. According to Thomson Reuters data, 2014 was the best year on record for M&A activity since 2007 with over 40,000 announced deals reaching nearly $3.5 trillion in aggregate value. This pace remains strong in early 2015 with deals totaling $232.9 billion in January, marking the busiest start to the year for M&A transactions since 2011.

"In this vibrant M&A environment, post-merger integration is a critical factor in achieving deal success," said Tom McGee, deputy chief executive officer of Deloitte LLP. "The Integration Report provides insights into navigating potential challenges, while reinforcing much of what we advise our clients–effective integration planning and flawless execution are necessary components for capturing a deal's full value."

Deloitte's Integration Report 2015 findings dig deeper into insights from the M&A Trends Report 2014. That report, released in May of last year, revealed the vast majority of corporate executives believe that at least some portion of past deals failed to generate the expected return on investment, and that a majority of corporate (55 percent) and private equity (54 percent) respondents cited failure to integrate effectively as a top area of concern in pursuing a deal.

The Integration Report 2015 revealed respondents' sentiment that ensuring a smooth transition from the beginning of the merger – the day the deal closed and the combined entity became operational – correlated very highly with overall success. Moreover, an analysis of survey responses uncovered five distinct best practices that helped shape what makes and breaks the success of deals.

Synergy and Value Capture
Successful mergers start with a clear understanding of the synergies a deal aspires to capture with respondents reporting measuring and achieving synergies as one of the key components for determining a transaction's success. Fifty-two percent of the executives surveyed estimated that the total benefit from the synergies between the companies was less than half the total deal value.

"The goal of capturing synergies is to create value – improve operating margins, enhance the balance sheet and provide shareholder value," noted Mr. McGee. "We have seen several common threads among companies that have successfully integrated acquisitions and mined synergies. These include holistic planning, broad due diligence and appreciation of the complexities of execution across all aspects of operations."

Readiness
After devoting significant time and resources to negotiating a deal, it's easy to overlook the procedures that keep a business running once the merger is complete, and the Integration Report 2015 found that one of the main reasons M&A transactions don't achieve the expected benefits is poor preparation for the post-merger period. Looking at specific business areas, respondents cited Information Technology as the functional area with the greatest need for improvement in terms of integration skills and capabilities.

Organization
The Integration Report 2015 highlighted several organizational factors as critical in fostering successful integration: having executive leadership support, involving management from both the acquirer and target, and developing an appropriate plan that optimized the use of resources, budget and timing.

Further, respondents pointed to the importance of having a cross-functional, post-integration leadership team with a large majority of respondents (82 percent) indicating they created such a team and the overwhelming majority (90 percent) saying it was pivotal to a successful integration.

Operating Model
Operating models have a tremendous impact on performance and competitiveness, and survey respondents noted this was especially true when combining disparate companies through a merger. Nearly two in three said their operational redesign was effective and 40 percent said it was very effective.

Communication and Culture
As companies merge, clear communication can maximize the value of the transaction. Transparent and consistent communication with employees was cited by respondents as one of the top five factors driving a successful integration. Furthermore, while the vast majority of the executives surveyed (76 percent) said that culture alignment between the two companies was important to the overall success of the integration, roughly 30 percent said their alignment efforts were not effective.

Conclusion
Looking toward future deals, respondents said they would focus on better capturing of synergies through a swifter and phased integration, as well as more effective communication and a more rigorous process to select an integration team. They also said they would allocate greater resources to the integration.

"Smart integration planning from the start can lead to smoother execution, and help ensure that the upfront work doesn't go to waste or is lost in translation upon completion," concluded Mr. McGee. "By taking the time and making an investment through planning and insights from broad-based internal and external teams, companies can better ensure that they meet and even exceed deal expectations."

Research Methodology
From November 15 to December 18, 2014, a Deloitte survey conducted by OnResearch, a market research firm, polled 803 executives at U.S. companies that had either engaged in a merger or acquisition over the preceding 24 months or was planning one in the next 12 months, or both.

About Deloitte M&A Practice
Deloitte advises corporate buyers and private equity investors throughout the entire M&A deal lifecycle from strategy development to selecting the right partner and from conducting thorough due diligence to closing the deal. Throughout the integration process or even through a divestiture, we align our services to address clients' transactional and integration needs, all with the goal of building value for our clients.  View the entire Integration Report 2015 report.

As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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