Mergers and acquisitions (M&A) are inherently risky: research repeatedly shows that around 70 percent of them fail. But not all deals are the same: the ‘why’ behind the acquisition matters. Some synergies are simply easier to realize than others. The motive therefore largely explains the eventual success.
By Killian McCarthy
Cost savings and operational synergy: low risk, high success rate
Acquisitions aimed at cost savings and operational synergies are considered relatively low risk. They revolve around tangible benefits that are usually easy to estimate and quick to achieve. Think of overlaps in procurement, production, or logistics.
Research shows that, on average, about 60 percent of the projected cost savings are actually realized after the deal. In short: these deals usually work.
A good example is ASML’s acquisition of Cymer in 2013. The goal was to achieve operational synergies and better integrate technology. Even before the acquisition, ASML was Cymer’s most important customer, heavily dependent on its light sources for lithography machines. By bringing Cymer in-house, ASML reduced its dependence on external suppliers, leading to an estimated cost reduction of 15 percent and a margin improvement of 5 percent.
High risks, low chance of success: growth and innovation goals
Acquisitions aimed at entering new markets, launching new products, gaining new technology, or driving innovation are considered high risk. The benefits are harder to quantify and even harder to realize. Integration costs – especially in foreign acquisitions – are often underestimated.
Research shows that less than 20 percent of acquisitions focused on innovation actually produce innovation, and only 5 percent deliver the promised breakthrough. On average, only 7 percent of projected growth synergies are realized after the deal. These deals often fail.
Google’s acquisition of Motorola is a classic example. In 2012, Google bought Motorola for 12.5 billion dollars, intending to develop its own smartphone to strengthen the Android platform. Integration problems plagued the deal, and within two years Google sold Motorola again at a 10 billion dollar loss. Instead of creating an ‘iPhone-killer,’ the deal became one of the biggest failures in Google’s history.
Finding the balance
Managers must understand both the rewards and the risks behind their deal motives. Operational synergies may seem boring, but they are often reliable and can be calculated in an Excel sheet.
Growth and innovation synergies sound attractive, but they are uncertain and often require hard work, significant time, and large capital investment.
If your deal belongs to the 85 percent that hinge on ambitious ‘dream scenarios’, don’t be surprised if you achieve only 7 percent of the promised synergies – unless you are prepared to invest deeply.
Key insights:
• More than 70 percent of acquisitions fail.
• Deals focused on cost savings succeed significantly more often.
• About 60 percent of projected cost savings are achieved.
• Deals focused on revenue growth are considerably riskier.
• Only 7 percent of projected growth synergies are realized.
• Growth-focused synergies are achievable, but require much greater investment.
Killian McCarthy is a Professor of Strategy at Radboud University. He has studied the performance of more than 500,000 mergers and acquisitions and, in this series of articles, highlights some of the key reasons behind their success and failure. This article previously appeared in the Dutch M&A Magazine.
