To capture value, dig deep into synergy details
Information is everything when a company is pursuing and completing a transaction, whether it’s a standalone purchase or sale, an integration, a carve-out, or a tuck-in.
Companies need to dig deep for information with a sufficient level of detail to realize the full value they have articulated in their deal hypothesis.
“Deal success is a function of the rigor that underpins each step of the process. It starts by lifting the hood of the company and understanding the opportunity.”
“Deal success is a function of the rigor that underpins each step of the process. It starts by lifting the hood of the company and understanding the opportunity, the rationale behind the deal, and really getting into the details,” said Grant Thornton Transaction Advisory Managing Director Tim Douek.
Grant Thornton leaders suggest that as organizations work through the M&A process, they organize transaction activities into four categories:
- Creating the vision
- Taking control
- Engaging people
- Capturing the value
The activities in these categories don’t necessarily take place sequentially, but rather often proceed simultaneously and continuously. Grouping them in this manner helps leaders understand the larger goals of their individual tasks as they work to get the most out of a deal. This article will discuss the key things leaders need to consider as they create a vision for a deal.
What does success look like?
A typical deal hypothesis often captures the broad intentions of the transaction, but it often doesn’t delve nearly deep enough into the details to determine all the value that can — or cannot — be created through the deal.
As leadership considers a possible deal, it’s important to create a clear, strategic rationale for the transaction that captures all the value that should be achieved. This is where many organizations engage third-party providers with deep transaction experience. These providers seek information and discuss with management to understand the nuances behind the numbers and determine what success should look like in the deal and how quickly it can be achieved.
At this early stage of the transaction, it’s important to understand:
- The composition of both the buyer and the target, and whether they will be merged or operate as separate entities.
- The activities of the functional groups at each company.
- The organizational design.
- Processes and operations.
“You will have financial synergies, operational synergies, sales and marketing synergies, and perhaps other categories of synergies,” Douek said. “And they all will fit together. A detailed synergy assessment can provide a blueprint for accountability and transaction success; without it the synergies may not be accomplished.”
Responsible parties must be established for each synergy goal, and leaders should be held accountable for following through on them.
Without a detailed list of synergies and accountabilities for achieving them, the merged organization is still likely to capture some value. However, to fully realize the value of the deal, leadership needs to fully understand the many opportunities a transaction creates, which will combine to provide substantial benefits.
Paying a fair price
Although everybody wants to get a bargain in a deal, Grant Thornton Transaction Advisory Principal Kosta Kourakis said it’s more realistic to aim to get a fair price, whether you’re buying or selling. He said the transaction market is like a typical real estate market where there’s enough activity that a fair market price can be determined.
“It is critical not to overpay by giving the seller credit for synergies that can only be realized by the buyer.”
“Acquirers should look to pay a fair price for the asset based on standalone results, with additional value realized through the achievement of synergies and operational improvements. Expected realization of synergies may drive a higher multiple; however, it is critical to not to overpay by giving the seller credit for synergies that can only be realized by the buyer,” Kourakis said.
Discovering that fair price requires financial diligence that focuses intently on the key value drivers in the deal. That helps both parties understand where they should focus their time and effort during the transaction. But ideally, the analysis doesn’t stop with scrutiny of the financials.
Diligence on human resources, technology and the supply chain can identify factors that will affect earnings and valuation. This deeper look at the organization can reveal more synergies and provide more insight into what a fair price might be.
Although it’s important to understand the details of the organization’s accounting, enterprise diligence needs to go deeper.
“It all relates to the operations of the business,” Kourakis said. “There could be HR, IT, or supply chain issues that affect the underlying financials of the business. This is what you need to understand.”
Getting smart on taxes
Tax structuring and planning is one area that sometimes gets overlooked in M&A planning.
“Tax is often the last thing people want to think about because it’s so complicated that people would rather ignore it,” said Grant Thornton M&A Tax Partner Meghan Jodz. “So tax often gets left behind. And that’s a big, big mistake. Tax structuring and planning should be done early and often.”
Although almost any deal can present a tax strategy and structuring benefits, these opportunities may increase as the complexity of the companies involved in the deal rises. For example, if the buyer and the target are both multinational groups, there may be transfer pricing associated with the integration and decisions to be made on who owns the intellectual property, who’s making or selling the product, and how the cash will flow throughout the organization.
“Tax structuring and planning should be done early and often.”
“The cash taxes and the effective tax rate that the two companies have right now may be completely different when you put them together,” Jodz said. “You might have unexpected results, so thinking ahead to the tax strategy is very important, and you need to think about structuring the deal properly to get to the ultimate goal.” Contemplating the structure and tax benefits (or detriments) that can be created by the transaction is one of the key elements to get right prior to the execution of the letter of intent, because it may be difficult to re-negotiate the structural framework later in the process.
Once a basic structural framework is agreed upon between the parties, it is important to develop a detailed step plan that considers all the tax consequences. The step plan is a living document that evolves throughout the deal progression, culminating in the closing of the transaction, and often continuing on to provide a foundation for future structural optimization post-closing.
The due diligence period is the optimal time to prepare the step plan as well as any modeling of tax attributes that may be either enhanced or diminished as a result of the transaction. Both of these items, as well as the due diligence report, can be handed over to the tax team so that they are ready to integrate and report taxes relative to the target on day one.
Making well-informed decisions
Understanding the deal objectives, synergy opportunities, financial situation and tax structuring opportunities can help an organization understand the adjustments it needs to make from a standalone cost perspective to arrive at a fair price.
“It’s all about making sure you have information to make a well-informed ‘go’ or ‘no-go’ decision,” Douek said. “And once you decide to ‘go’, it’s about making sure that you’re not overpaying, and that you have a plan in place to make sure that it’s a successful transaction.”
Contacts:
Tim Douek
Managing Director, Transaction Advisory Services
Grant Thornton Advisors LLC
Timothy Douek is a Managing Director within Grant Thornton’s Transaction Advisory practice. He provides a range of transaction diligence services with a specific focus on the design and deployment of profitable, sustainable strategies for organizations looking to optimize their operating models through organic and inorganic growth.
Philadelphia, Pennsylvania
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