Synergy management pitfalls in mergers and acquisitions

Abstract

Purpose – The purpose of this paper is to advance a conceptual comprehensive framework to analyze synergy management pitfalls in mergers and acquisitions (M & As). The framework highlights the main dimensions of synergy management, the most relevant synergy pitfalls and the ways to overcome them. Design/methodology/approach – A greater recognition of synergy management literature in M & As is developed. A framework is provided integrating the compatible elements of previous broad areas of research and the main findings of studies on several topics related to synergy. Findings – Prior literature has suggested that synergy is an important motivation of M & As, has tended to be overestimated and has been difficult to achieve. Specifically, there are three relevant synergy pitfalls: the “mirage,” a tendency to overestimate synergy potential, the “gravity hill,” the underestimation of the difficulties in synergy realization and “amnesia,” a dangerous lack of attention to the realization of synergy. An effective synergy management requires an analysis of five dimensions: the steps of the M & A process, the several values of synergy, the forbidding effects of poor synergy management, the potential causes of synergy inflation and the selection of solutions to synergy pitfalls. Practical implications – The comprehensive framework suggests insights and guidelines to help managers to overcome pitfalls in synergy management. Managers will learn the following lessons: “when” pitfalls should embrace synergy management; “where” pitfalls may occur; “why” pitfalls may occur; “what” consequences can result in a value of “realized synergy” lower than the “expected synergy”; and “how” actions, tools and behaviors can overcome hidden dangers in synergy management. Originality/value – The study changes the focus from a single, generic synergy trap to three more analytical, useful synergy pitfalls: the mirage, the gravity hill and the amnesia. By shedding light on synergy management pitfalls, this paper enriches M & A literature and enhance practical solutions to reduce pitfalls in synergy decision making.

Searching for synergy from a combination of heterogeneous business models: measurement and assessment from the Polish software industry

“…In accordance with our approach, outlining a picture of the synergy potential in the areas of market, operational processes, and development becomes the starting point for quantifying the value (added) of a combination of business models. In the context of the effective management of synergies, the financial perspective becomes more important if the expected synergies are close to the potential synergies (reduced by integration costs) in other areas, which is in line with the relationship between several values of synergy proposed by Fiorentino and Garzella (2015) . Only then can the values of key financial parameters in the M&A process be estimated with a sufficiently good approximation (e.g., the discount rate value for estimating NPV or WACC).…”

“…Mergers and acquisitions (M&As), as a means of overcoming barriers to business development, have long been the subject of research and attracted the attention of the industry (cf., Haspeslagh and Jemison, 1991 ; Mitchell and Mirvis, 2001 ; Lynch, 2006 ; Zollo and Meier, 2008 ; KPMG, 2011 ). Although synergy effects have become one of the most important determinants of M&As, they have not been fully recognized (see Sirower, 1997 ; Capron, 1999 ; Mitchell and Mirvis, 2001 ; Mukherjee et al., 2004 ; Krishnan et al., 2009 ; Fiorentino and Garzella, 2015 ). Despite the crucial importance of synergies to M&As, the market is highly skeptical about the valuation of its estimated effect ( Goold and Campbell, 1998 ).…”

“…The existing literature on the techniques of evaluation or measurement of synergy in M&As presents narrow or wider proposals for their depiction. Narrow proposals are largely focused on: (a) synergy sources ( Lubatkin, 1987 ; Kaplan, 2010 ); (b) factors to success ( Cullinan et al., 2004 ; KPMG, 2011 ); (c) anomalies concerning large-company combinations ( Sirower, 1997 ); (d) synergy management pitfalls ( Fiorentino and Garzella, 2015 ); (e) M&A principles ( Christensen et al., 2011 ); (f) ways of balancing the synergistic benefits ( Markides, 2008 ); (g) systematic risk or reduction of risks ( Chatterjee and Lubatkin, 1990 ; Chatterjee, 2007 ); (h) resource interactions ( Chatterjee and Brueller, 2015 ); and (i) challenges in managing acquisitions ( Haspeslagh and Jemison, 1991 ). The wider proposals for techniques to assess or measure synergies include: (a) models for measuring synergies in Pre-M&As ( Ansoff, 1965 ; Wartini-Twardowska, 2014 ; Fiorentino and Garzella, 2015 ); (b) factors of failure ( Haspeslagh and Jemison, 1991 ); (c) methods of valuation ( Damodaran, 2006 ; Lenz, 2011 ); (d) model of conditions determining the success of M&As ( Chadam and Pastuszak, 2013 ); and (f) classification of measures or identification of measures in the context of M&A performance ( Zollo and Meier, 2008 ; Meglio and Risberg, 2010 ).…”

“…Synergy is the main factor in value creation in M&As and the most important motive behind them as well. However, synergistic effects are difficult to achieve and among the reasons are the synergy pitfalls that threaten them ( Fiorentino and Garzella, 2015 ). According to Sirower (1997) , the synergy trap occurs among companies involved in large acquisitions that have not made pre-acquisition plans.…”

“… A synergy measurement model integrates the four following strategic factors: Type of synergy; Size of synergy; Timing of synergy; Likelihood of achievement. Fiorentino and Garzella (2015) A framework integrating the compatible elements of research and the main findings of studies on synergy Synergy, as an important motivation for M&As, has tended to be overestimated and has been difficult to achieve Relationships between several values of synergy The dimensions of synergy pitfall management: The steps of the M&A process; Several values of synergy; The effects of poor synergy management; The potential causes of synergy inflation; The selection of solutions to synergy pitfalls. Three relevant synergy pitfalls: The “mirage” - a tendency to overestimate synergy potential; The “gravity hill” - the underestimation of the difficulties in synergy realization; “Amnesia” - a dangerous lack of attention to the realization of synergy.…”