No pain, no gain
Pitfalls and best practices for planning
and realizing revenue synergies
1
Research findings on realizing revenue synergies
Making mergers and acquisitions work is not easy.
Conclusion of our research is that revenue synergies
No pain, no gain
Realizing revenue synergies is a key value driver in
can contribute significantly to creating value through
corporate M&A (Mergers & Acquisitions), but has
M&A, but it requires leadership, careful preparation and
proven to be one of the most difficult aspects. Turner
disciplined execution: no pain, no gain.
Introduction
and Nyenrode University conducted research into
planning and realizing revenue synergies. Extensive
This research was conducted for and by Turner’s PMI
literature research and interviews with corporate
(post merger integration) practice in our ongoing
management and staff of a wide variety of companies
search for knowledge and understanding of creating
gave valuable insights into the pitfalls and best
value through mergers and acquisitions in order to
practices for a complex issue.
better help our clients dealing with M&A. Use it as
a magazine, each segment can be read separately. It
2
Revenue synergies are the increase in sales revenue,
starts with a summary of the six main conclusions
by enhanced sales volumes and/or sales prices, of the
of the research. Then we present our framework for
combined firm over what the two firms are already
creating value through M&A, which has been the
expected or required to accomplish as individual
basis for this research. The next six chapters each
firms. We distinguish six different types of revenue
handle one of the main conclusions in a more detailed
synergies: cross-selling, shared sales skills, combined
manner. Each of these chapters describes the issues at
product
power,
hand and the solutions we came across to face those
improved geographical coverage and forward vertical
issues effectively. The last chapter is dedicated to our
integration.
research method.
development,
increased
market
3
Index
14
18
22
Firms are frequently not fully aware
of the variety of revenue synergy
opportunities and miss out because
of that.
An increase in revenue is only possible
with proper understanding of clients.
Managers are afraid to set growth
targets. This leads to a singleminded
focus on realizing cost synergies.
26
30
34
Absorbing
another
company
in
one’s own business model is not
as
straightforward
as
most
managers think.
One cannot integrate new business
without adjusting the ‘old’ company.
Cost synergies are (mostly) properly
defined and addressed in programs,
whereas revenue synergies are often
just handles as normal business.
Be aware
Scrutinize
Know clients
Change
Be brave
Invest
2 Introduction
6 Summary
8 Theoretical framework
38 Research Method
About Turner
Colophon
Issued by Turner.
Authors
Copyright 2009
Turner management consultancy is
is known as a high-grade independent
advice, a customized approach and co-
Post Merger Integration practice
Martijn Babeliowsky
Nothing in this issue may be duplicated
Olav de Maat
and/or published by means of print, copy or
specialized in strategy implementation.
management consultancy with a proven
production with the client organization:
Wouter Bruggers
in any other way, without written consent of
Our mission is to achieve solid and
track record in both private and public
sustainable change because people
sustained performance improvement
sector. We make strategy work, based
matter and results count.
and highly motivated people. Turner
on sharp transparent analysis and
the publisher.
Design
Henry Hennipman
4
5
have long been met. Employees are
1. Be aware
straightforward as most managers
searching for self-actualization and
Firms are frequently not fully aware
think. Scrutinize both business
want to know what a company can
of the variety of revenue synergy
models.
bring them in the long run. Short-
opportunities and miss out because
synergy purposes means changing
term cost cutting does not fit that
of that. Be aware of the types of
revenue models. Changing revenue
desire and might result in talent
revenue synergy to pursue. Each
models affects the whole of the
leaving
revenue
Increase
type requires a different approach.
business model. Knowing how
Using the wrong approach means
it affects the company is crucial
positive outlook that helps their
losing possible revenues.
for staging synergy and making it
to
company.
for
in revenues gives employees a
readiness
the
Merging
put
their
weight
behind the integration.
come true.
2. Know clients
When
merging,
companies
do
5. Change
Still, realizing revenue synergies
not focus enough on what clients
One cannot integrate new business
remains difficult, as indicated by
want. However, clients are the
without adjusting the ‘old’ company.
Summary
the statistic above: 70% of mergers
number
causing
It is not just the acquired that lose
do not realize planned revenue
stakeholder. Clients have reasons
their identity. Lose the old way of
synergies. So, how to plan and
for (not) buying the stuff your
working. The two companies build
No pain, no gain
realize them?
merged company has to offer them.
one new company together. Even
Understand what clients expect and
with huge size differences, both
want in the new business context
companies will never be the same.
Merging must be for revenue too
Revenue synergies, who dares?
one
revenue
due to a merger, and actively
All parties involved must be aware
What we found was that the
involve them. Knowing your client
of this. Going back to business
typically offset a 25% failure on
Secondly, revenue synergies more
acquiring company must be willing
means knowing where to focus
as
anticipated cost savings.)
frequently are part of the take-
to invest in order to gain those
on when planning and realizing
for synergy.
over
sought-after
revenue synergies.
Making mergers and acquisitions
(M&A) work is not easy. Other
Realizing
revenue
research shows that many deals do
becomes
more
not create value. Different studies
important. First of all, we are in an
indicate that on average 40% of
economic downturn. First item on
mergers do not deliver planned
the management agenda in these
cost synergies and no less than 70%
fail to achieve expected revenue
synergies
price,
since
competitive
revenues.
It
must
usual
is
the
best
remedy
bidding between interested buyers
lose its old and easy-going ways.
has
common.
Obtaining extra revenues is not
3. Be brave
Invest time, money and project
Stakeholders -- and specifically
something one summons forth. The
Revenue synergies are very hard
capacity. Pursue revenue synergies
shareholders -- want to know
acquirer must get out of its seat.
to quantify up-front. But still,
in the same way as you do cost
how a company is planning on
It is not only the target company
merging companies must not be
synergies. Revenue synergies will
times is cutting costs. Sadly, a lot
maintaining
Merely
that has to be taken apart and
afraid to make estimates and set
not just come to be by increasing
of companies are at the bottom of
reducing costs is no longer enough
reassembled. The acquirer must
targets. Management should stand
top-line targets of line managers.
synergies. Most companies, when
their bottom line. Cutting more
as a business case for making the
also consciously investigate itself
for those targets as if they are the
They must be built and monitored
merging, focus on cost reductions
costs would be equal to cutting
investment of merging.
in order to ascertain where and
whole truth. Ignoring to do so will
with a much higher attention level
through
how integration of the acquired
lead to wavering faith, which leads
than ‘normal’ business.
company can be done successfully.
to volatile revenues.
of
more
become
more
growth.
scale.
into the very core of the company,
However, it is mainly revenue
which makes it less likely to come
And thirdly, giving employees a
instead of cost that determines
out fighting when the economic
positive perspective becomes more
the succes of a merger (e.g. one
tide turns. Fixing and solidifying
important. We are at the top of the
We found that six specific topics are
4. Scrutinize
study suggests that beating a
the top line is a safer and more
Maslow pyramid. Our primary --
the key to successful planning and
Integrating another company in
target revenue growth by 1% can
durable remedy for hard times.
physiological and safety -- needs
realization of revenue synergies.
one’s own business model is not as
6
economies
and
6. Invest
7
Framework
of value creation through M&A. Our research on
CONSIDERATION
planning and realizing revenue synergies is built on
Are you
paying
too
much?
Value creation by integration
Value
today
Potential
value
VALUE CREATION
POTENTIAL
3
Turner’s framework for creating value through M&A,
2
developed in over fifteen years of experience in M&A
1
and integration projects. The main elements of this
5
4
2. Value
creation
requires
integrating
3
Value
through M&A
Synergies New
strategies
2
1
Target risk
business models
3. Value creation requires careful planning and
structured realization
4. Key stakeholders are not only shareholders, but
A merger or acquisition is not a goal in itself, but one
Standalone
value
Totale price
Deal costs
Premium
Standalone
value
through M&A
What is
the base value
of the means for companies to create value. Whether
Destroy
value
Intergration
risk
also clients and employees
5. ‘Soft’ factors are of the utmost importance
1. Synergies are key drivers of value creation
Create
value
6
framework are:
1. Synergies are key drivers of value creation
New
strategy
risk
one must first understand the broader concept
Synergy risk
for value creation
through M&A
To understand the specifs of revenue synergies,
What is the
potential to
create value?
What is the risk
that value will not be
realised?
value is actually created depends on the result of three
parameters (see figure 1):
Figure 1: Value creation through M&A
1. The price paid for the acquired business in relation
to the actual stand-alone value
2. The mitigation of M&A related risks that could lead
to value leakage (also referred to as dissynergies)
3. The
synergies
achieved
by
combining
the
leakage due to the transition. In the introduction of
Revenue synergies particularly refer to an increase in
this report we already indicated that the impact of
sales revenue by enhanced sales volumes and/or sales
revenue synergies on value creation has proven to be
prices of the combined firm (on top of what the two
significantly higher than cost synergies.
firms are already expected or required to accomplish
as individual firms). Based on our own post-merger
two businesses
8
We define synergies as the increase in performance of
integration practice, and validated during our research,
Value is only created if the synergies achieved
the combined firm over what the two firms are already
we distinguish six types of revenue synergies, as
compensate for the paid premium and actual value
expected or required to accomplish as individual firms.
depicted in figure 2 on the next page.
9
Type of Revenue Synergy
1. Cross-Selling
2. Combined Product Development
Definitions
The combined entities’ ability to sell their products and/or services to
each other’s customer bases.
The combined entities’ ability to combine products or services to create
unique solutions.
3. Shared Sales Skills
The combined entities’ ability to draw upon the stronger sales skills of
one company to improve the sales force performance of the other.
4. Increased Market Power
The combined entities’ ability to gain more revenues by benefiting from
a stronger market position.
5. Improved Geographical Coverage
6. Forward Vertical Integration
Figure 2: Different types of revenue synergies
The combined entities’ ability to serve additional customers through
enhanced geographical coverage.
The combined entities’ ability to ensure a continuous demand for a
company’s product by means of additional or exclusive distribution
channels.
Note: one could argue that there is a seventh type of revenue synergy: Cost Leadership,
defined as the combined entities’ ability to increase competitive advantage by enabling
product price reductions through cost synergies. This type of revenue synergy clearly is
of a different nature and therefore not the main focus of this report.
2. Value creation requires integrating
business models
to be made on how the business models of both
Planning value creation
structured realization
In parallel with the deal making process, the acquiring
firm should develop a sound and feasible business
The challenge of value creation is twofold: preventing
case: what are the specific drivers for value creation,
value leakage due to loss of clients and talent, and
and what needs to be done to actually make it
optimizing synergies. Creating value starts before the
work? In addition, a first draft of the integration plan
deal is closed, and requires a structured approach. The
should be developed that will guide the post-deal
integration process.
Deal signed
Predeal
Closing
Day 1
Deal
completion
“We agree
where the value
drivers are”
“We are ready
for Day 1”
Deal making
Day 1 preparation
Planning value creation
First 100 days
“We know what
we will change
and can see how
it will work”
100 Day
integration
planning
Long term integration
“We can start to
see benefits
flowing through”
Implementation
“We can see
further flow
through of
benefits ”
Optimization
Integrated
company
decision making processes within a corporation.
Figure 3: Main steps for M&A
3. ICT & Means: focuses on the question with what
the primary process is or should be supported, e.g.
When two companies merge, clear decisions have
3. Value creation requires careful planning and
main steps to be followed are summarized in figure 3.
technology, machines, buildings, but also forms
and formats.
Day 1 preparation
From the first day onward, the two companies must
Deal making
start operating as one. The first day should be an
companies will be combined. All aspects of the
4. People & Culture: all things having to do with the
Mergers and acquisitions start with a deal between
issue-free day where solutions are 70% perfect but
business models should be assessed as to whether
human part of organizing (such as behavior, job
the firms involved. After an initial agreement due
100% achievable, therefore not destroying any value
they are complementary or mutually exclusive. Also,
positions, competencies and rewards).
diligence is conducted to assess the value of the firm to
of the merged firms. To prevent dissynergies and value
be acquired. Final terms are set, based on negotiations
leakage, careful preparation of the transition on day 1
on price, strategy and conditions, resulting in a sale
is key.
these aspects must be balanced into one new coherent
business model.
5. Knowledge: concerned with the knowledge that is
crucial to the company’s success.
and purchase agreement. Synergies have become a
We discern five aspects in a business model:
These five aspects are all vital for optimal operations
more and more important factor: synergies can enable
100 day integration planning
1. The primary process: creates the output and is
within a company. They must be mutually balanced,
firms to offer a better purchase price which can make
The first 100 days are a crucial period. All stakeholders
the “added value” for a company. The other four
reinforcing one another. Making a change in one of
the difference between winning and losing the battle
expect changes, and this is the window of opportunity
aspects support the execution of the primary
the aspects (e.g. process optimization) will not have
for a target company. In 2006 on average nearly
for clarifying those changes. The aim of the 100
process.
the desired effect if it is not supported by the other
43% of all potential synergies were included in the
day integration planning step is to define how the
aspects (e.g. the right capacities for performing the
take-over price.
business models of both firms are to be combined.
2. Organization & Structure: includes such things as
planning and control, corporate governance, and
10
new process).
11
Furthermore, realization of quick wins in this stage is
Of all stakeholders, the shareholder usually gets most
very important for boosting the morale of employees
if not all attention during mergers and acquisitions.
and other stakeholders. Output of this period is a
We consider this to be an ineffective way of working.
detailed implementation plan.
An organization should always find an optimum
between the values of all stakeholders as they all
Implementation
have a direct effect upon the long term profitability
This step is about implementing the integrated business
of a company. Shareholder value is determined by a
model, thereby creating the conditions for actually
short term outlook. Integrating two companies and
achieving synergies. This includes adjusting and
realizing revenue synergies is not a matter of months.
tuning processes and systems, combining departments
It takes years. Making sure the needs and wants of all
and
stakeholders are met means that all stakeholders will
rightsizing
or
downsizing
headcount,
and
aligning cultures.
contribute to the total value of the organization over a
longer period of time.
Optimization
The full value creation potential is very rarely achieved
5. Importance of soft factors
in one go. After a while new market circumstances and
additional insights into the businesses involved require
Benefits
adjustment of plans (second wave). Based on lessons
accomplished if the people within the organizations
learned and results achieved thus far, optimization
involved truly change their ways of doing business.
opportunities should be identified and planned, so that
Effective organizational change requires a balanced
the full benefits of working together can be achieved.
focus on hard and soft factors. Hard factors concern
of
mergers
and
acquisitions
are
only
issues that can be designed, calculated and measured.
4. Key stakeholders are not only shareholders, but
Soft factors are about all things that can be done to
also clients and employees
optimize the change process, stimulate commitment
and address emotions.
Each organization has its own set of stakeholders with
their own set of stakes. In general there are three types
When merging, both aspects of change are of equal
of stakeholders:
importance. Most of the time, management focuses
on the hard issues when deciding on taking over
1. Shareholders: the owners and/or decision makers
of the company.
or merging. Questions about markets to be served,
products to be delivered or parts of the overhead to
2. Customers: people or companies that (might)
become redundant outweigh questions about cultural
purchase and/or use products and services
differences, management styles or insecurity among
of a company.
employees. We believe that, even when making a
3. Employees:
the company.
the
people
that
work
for
business case for merging, one needs to incorporate
the soft issues too. Failing to do so, will affect the
outcome of M&A in a negative way.
12
13
Issue: more than meets the eye
In our research we found that only few companies
or less detailed (revenue) synergies plan. However,
had clearly articulated what they exactly meant with
none of the companies used a structured method for
revenue synergies. There are many ways to increase a
exploring and identifying the revenue synergy areas to
company’s revenues, and the same holds for realizing
be included in this plan.
revenue synergies. Firms are frequently not (fully)
aware of the variety of revenue synergy opportunities,
The fact that firms are not fully aware of the variety
and in many cases do not clearly define what types
of revenue synergy opportunities and frequently fail
of revenue synergies they anticipate to realize in a
to clearly define the type(s) of revenue synergies they
particular merger or acquisition. Some companies
want to pursue, brings about two key issues:
expect to achieve revenue synergies by just adding the
other company’s turnover, instead of really generating
1.
Firms are not fully exploiting the value creation
additional sources of revenues, on top of the revenues
potential of a particular merger or acquisition
of the combined firms.
Firms tend to go for the obvious synergy areas
only, and do not structurally check the full range
Also, there is no clear terminology available for revenue
of synergy opportunities. In this way they could
synergies. For instance, there appears to be ambiguity
miss out substantial value creation potential.
about a term like cross-selling. Sometimes cross-
2. Firms are not able to define an appropriate and
selling is considered to focus purely on increasing the
effective integration strategy
share-of-wallet of individual clients by selling them
Different types of revenue synergies require
additional products or services, in other cases cross-
different integration approaches. Using the wrong
selling is defined more broadly, including the use of
approach means missing certain revenue synergies,
each other’s distribution channels.
or even worse, creating revenue dissynergies.
A number of companies involved in our research
Be aware
Firms are frequently not fully aware of the variety of revenue synergy
opportunities and miss out because of that. Be aware of the types of
revenue synergies to pursue. Each type requires a different integration
approach. Using the wrong approach means losing possible revenues.
14
prepared the merger or acquisition by making a more
Case: value potential ignored
During the preparation of an acquisition,
year after the acquisition, it has become
business appear to stimulate cost savings
the deal making team of an industrial
clear that there are in fact substantial
and clearly hinder any cross-selling
company focused on a proper valuation
cross-selling
However,
initiatives. Management now confesses
of the stand-alone target company and on
no progress is made in this area yet:
that, had they known this from the start,
potential cost saving synergies. Revenue
management is still very busy with difficult
they would have made different choices
synergies were no topic for discussion,
cost saving measures. What is more,
for the integration strategy.
since these were clearly not solid enough
the chosen management structure and
to include in the business case. One
incentive system for the newly acquired
opportunities.
15
Solution: check it all
Explore all types of revenue synergies
We also found that there are a few logical combinations
of types of synergies. Cross-selling and shared sales
Benefiting from the full revenue synergy potential
skills is one of those combinations. They both have to
starts with clearly defining what the potential synergy
do with reinforcing the sales force. Also, when cross-
areas are, and ensuring that everyone involved in the
selling is in play, one starts selling one’s products
execution is aware of the range of synergy areas to be
to customers of the other. Without knowing how
dealt with.
to approach those customers, one can never be
successful. In those cases companies have to share
The most simple way to professionalize the synergy
their sales knowledge.
exploration process is by structurally checking all
possible types of revenue synergies. See figure 2
Another logical combination is product development
(p. 10) for an overview of revenue synergies.
and market power. In general a large company takes
over a smaller one in order to use the (product)
Choose the most appropriate integration
knowledge of the smaller. In turn, the smaller company
strategy up-front
uses the brand image and network of the larger
company in order to get new products into the market.
When a firm has defined the types of revenue synergies
To accomplish this, a well designed integration process
to be pursued, the next step is to translate the revenue
is essential.
“In the workshops
we not only explored
revenue growth areas,
but also discussed our
level of confidence
for each area.”
synergy ambitions into the best suitable integration
strategy. Each type of synergy requires a specific
Don’t forget potential dissynergies
approach in combining the two business models. Key
variables are:
The risk of losing business during the transition period
1. The speed of integration (quick and dirty or slowly
of a merger is huge. Sales cannibalization due to overlap
and gradually)
in customer and product portfolio, internal focus, loss
2. The level of integration (extent of consolidating
of key talent, operational disturbances, and increased
product portfolios, front office processes, back
attacks from competitors are common phenomena.
office processes, systems, etc)
Firms should anticipate well on these downside risks
3. The key driver of change (process driven or
people/compentence driven)
4. The level of involvement of staff (top-down or
bottom-up approach)
16
Showcase: joint exploration
and prepare mitigating actions. If not, more value will
A telecom company, in preparing the
to explore and quantify potential revenue
investments. This way, a challenging but
be destroyed than can ever be won back.
acquisition of one of its competitors,
synergy areas. In addition, synergy
feasible business case was developed,
carefully explored the synergy potential
figures of earlier acquisitions were used
resulting in a winning bid for the target
in order to enable a competitive bid,
to benchmark initial estimates. Scenarios
company and a clear plan for realizing the
since
potential
and potential issues were explored, and
required synergies.
bidders. Workshops were organized with
integration strategies were examined to
management and commercial personnel
assess feasible timelines and required
there
were
several
17
Know clients
18
for customers. Understand what clients expect and want in the new
business context due to a merger, and actively involve them. Clients
are the number one revenue causing stakeholder. Clients have reasons
One would say that an increase in revenue is only possible with proper
for (not) buying the products your merged company has to offer them.
understanding of clients. Surprisingly, we found that planning and
Knowing your client means knowing where to focus on when planning
realizing synergies has an internal focus, with very little attention
and realizing revenue synergies. It almost sounds like marketing…
19
Issue: “Clients? We’re merging here!”
Our research shows that in practice there is far too
little focus on customers during M&A. Companies
usually have limited dedicated resources for mergers
and acquisitions. The M&A related work needs to
be executed on top of the normal workload of the
going concern. Due to tight schedules and maximum
focus on achieving deadlines, time is limited. Excuses
for not carefully examining the impact of the
merger on existing and new clients are numerous.
Solution: marketing for new business
“Unfortunately we
were not aware of the
subtle differences in
our clients’ sourcing
requirements.”
Neither the literature we studied nor the interviews
To be honest, in many cases there is at the end of the
we held reveal valid reasons for ignoring customers
integration, some form of customer consultation, just
during M&A. Nevertheless it is a fact that customers
before the final marketing campaign. Mostly this is at
are involved too little. You think you know your
a certain point where assumptions already have been
clients? What was the last time you talked to them?
made and there is no way back.
During a recent assignment we asked employees of our
client company what their customers would say about
their services. After that we asked their customers
the same questions. The answers employees gave
Our top three is:
in order to better understand the quality of the
were in several cases the complete opposite of what
1. “We have no time for this.”
target’s customer base. But this will still not provide a
customers said.
2. “We already know our clients and markets
good understanding of how clients will respond to the
well enough.”
3. “We are not allowed to make contact with
measures anticipated in the integration of both firms.
“Time is scarce during M&A,” is the number one
Effects can be disastrous.
excuse. However, everyone knows time is a matter
of priorities. Also, companies hide behind the excuse
our (new) clients.”
The need for customer consultation is not that hard
that they are not allowed to talk to clients. Research by
Invalid excuses for a very important issue. Without
to understand. Then why do most merging companies
an independent third party is the cure for that. Involve
actual customer consultation it is not possible to
ignore this logic? Especially with realization of revenue
the marketing department in the M&A process as well.
understand what clients expect and want in the new
synergy, questions of this nature are very relevant.
One cannot deny that obtaining revenue synergies
business context due to the merger. Most merging
How will clients react to the new sales strategy? Do
by M&A is like a huge marketing program for new
companies depend on what they already (think they)
they actually want our new products? Is there a need
business. Would you launch a new product or service
know about their (existing) customers. Sometimes
for the way we are planning on servicing them? What
without a solid marketing study? This better be a
they also invest in a commercial due diligence process,
do they think is actually in it for them?
rhetorical question…
Case: unpleasant surprises
“Integration is a
complex process,
but in essence
it’s simple: it all
starts with our
customers.”
Showcase: food for thought
A big manufacturer (Big) acquired a
clients preferred to use different channels
requirements for the products of Big and
When a food producer completed the
meetings with clients of buyer and target.
and services were validated with several
smaller production company (Small) with
for the type of products Big was offering
Small. One-stop shopping of both types of
acquisition of a smaller competitor,
Main subject: client needs in the context
clients in order to develop a solid business
a strong network in a market segment
than for the type of products Small was
products was not an interesting solution
complementarities
and
of the extended business. Based on these
case for the anticipated changes and
where Big had almost no position. Big
offering. If Big would have asked its (new)
for clients. No cross-selling synergies
markets were clear. However the question
meetings, market segmentation was
investments. Result: a focused integration
thought cross-selling opportunities would
clients beforehand, it would have known
were realized.
still remained: how to fully benefit from this?
restructured, and product portfolios for
process with clear benefits for clients
be great. However, it appeared that most
about subtle differences in their sourcing
Directly after acquisition, management
each segment were optimized. Potential
and substantial revenue synergies for the
organized
client benefits of combined products
food producer.
20
an
of
products
intensive
process
of
21
Be brave
During the integration process, management attention appears to be
“We find it too risky to
quantify revenue synergies.”
Issue: unclear top line ambitions
mainly focused on realizing cost synergies. Main reason: during deal
making clear cost targets have been set, whereas revenue synergy
ambitions have been formulated rather vaguely. Revenue synergies
are very hard to quantify up-front, but this should not prevent merging
companies from being clear about their top line ambitions. Ignoring to
do so will lead to wavering faith and volatile revenues.
We found that lack of clear revenue synergy targets
to predict. Or, as one of our interviewees tautologically
is one of the main reasons why companies have
stated: “Predicting is always difficult, especially if it
difficulties in realizing revenue synergies. In many
concerns the future.”
cases management has clear and detailed targets for
cost synergies, whereas targets for revenue synergies
Since quantifying revenue synergies is hard, firms tend
are lacking or vague. In addition, achieving cost
to focus on cost synergies during deal making. Only
synergies is usually much more straightforward than
if really necessary, revenue synergies are included in
realizing revenue synergies. It is therefore not that
the business case. In those cases where firms chose (or
strange that management attention during integration
were forced) to quantify revenue synergies up-front,
is focused on cost synergies, whereas revenue synergies
they had substantial difficulties in getting to solid
are neglected.
and reliable figures. Intuition, experience and belief
(‘Fingerspitzengefühl’) are the main – if not only –
Why are revenue synergy targets often lacking
sources for revenue synergy target setting.
or vague?
Considering the fact that takeovers concern millions if
It appears that companies find it much harder to quantify
not billions of Euro’s, this is a remarkable fact. Research
revenue synergies than to quantify cost synergies.
has shown that conscious thought is no guarantee at all
One reason is that companies have more control over
for making the best decisions on big issues. However,
their own costs (just a matter of reducing workforce
this research is about decisions with limited choices.
or other resources) than over their customer’s buying
Estimating the amount of revenue synergies to expect
behavior. Another reason is that revenues are strongly
has many options and even more variables. Using your
influenced by market developments, which are hard
carpenter’s eye should not be enough.
Case: self-fulfilling prophecy
22
When insurance company A acquired B,
were considered not solid enough to
these received insufficient attention since
both cost and revenue synergies were
incorporate in the business case. After
they were not monitored in the same way.
foreseen. For cost savings clear targets
the acquisition, managers became very
Hence, progress on revenue synergies
were set, as these were included in
active with achieving their cost saving
was limited, and management – probably
the business case for the acquisition.
targets, which were thoroughly monitored
unjustly – concluded it had been a wise
Revenue synergy areas were identified
by the PMI office. They were also asked
decision not to include revenue synergies
as well, but not quantified since they
to work on the revenue synergies, but
in the business case.
23
Solution: put all cards on the table
Being successful with revenue synergies requires
3. Talk with your own and the target’s customers
in acquisitions. The amount of synergies and
as soon as possible
dissynergies
previous
Notwithstanding our belief that using just your
synergies. Objectives and targets should be defined up-
This topic is already addressed in the chapter
acquisitions (in similar market segments) can
intuition is not enough when you set the bar for
front for both types of synergies, whether these targets
Know clients. It is obvious that clients provide a
provide valuable benchmark data for a new
revenue synergies, some ‘soft’ factors come in play.
are to be included in the purchase price or not. Our
valuable source of information for assessing the
transaction.
interviewee
Especially leadership is a key success factor once
research revealed seven best practices for setting clear
potential impact of certain integration strategies.
mentioned that earlier acquisitions had shown
a revenue synergy ambition has been set. Most of
an increase in their customer turnover rate from
our interviewees said that the hard thing about
example,
in
one
17% to 25% in the first year after acquisition. This
these ambitions is that they are not as solid as
Start with rough numbers, refine along the way
for execution
provided a solid basis for estimating the revenue
cost synergy targets are. We say: so what?! Once
By using a phased approach in getting to solid
Involve managers, who will be responsible
dissynergies for their new acquisition.
you set the bar, you have to go for it. You cannot
targets it is not only possible to increase the level
for achieving the revenue synergy targets, in
of confidence for the synergy targets as soon as
developing the business case. They know the
possible, it also facilitates the translation of the
ins and outs of market dynamics. They will also
In the flow of the deal process it is very difficult for
targets into clear executable and controllable
automatically perform an important sanity check:
deal owners to keep both feet on the ground and
plans that can guide the efforts of the organization
will we really be able to realize these ambitions?
present an unbiased business case. It has proven
during integration.
But even more important, these managers will
to be very healthy to structurally organize checks
be much more committed to actually achieving
and balances in this respect. We have come across
4. Involve and commit management responsible
1.
For
achieved
Show leadership in setting targets
balanced management attention for cost and revenue
and feasible revenue synergy objectives and targets.
actually
7.
2. Apply a multidisciplinary approach during
say: “I think our revenue synergies will amount to
6. Organize a second opinion
20%, but don’t take my word for it. Anything can
the targets post-deal. As one interviewee stated:
companies where the central M&A department is
due diligence
“Without clear business owners we would never
always asked to conduct an independent check
By combining commercial, operational, financial
make an acquisition, because the integration will
on the business case presented by a business unit.
and HR due diligence all relevant aspects of the
definitely fail.”
In other cases an independent person outside the
business model can be examined, which is key in
order to assess opportunities, risks and required
measures for preserving and growing revenues.
happen…”
company with good knowledge of the respective
5. Use prior acquisitions as a benchmark
Many companies already have a track record
market sector was asked to test the synergy plans
by raising ‘tough questions’.
Showcase: let’s go for it!
“Even when in doubt,
you still have to set the bar.”
24
When integrating three divisions, the CEO
statement that sector A would be the way
their doubt and start to make choices that
stated that a certain sector of the food
to go. During the interview the CEO told us
would be unfavorable for the chosen path.
business (‘sector A’) would be the nucleus
he himself had doubts about this strategy
Because he showed leadership in creating
for growth of the joint organization. At first
too. He knew the choice made sense,
focus and setting targets, sector A did
his subordinates were skeptical about
but still. He also knew that he could not
become the fastest growing business.
this strategy. Nonetheless, the CEO kept
share his concerns. Had he done that, his
his course and made statement after
subordinates would feel acknowledged in
25
“Next time, I would not fit in something that is
not our own thing.”
Issue: inadequate diligence
It has become common practice to start as early as
processes, organization structures, systems, people,
possible with defining how two merging companies
culture, etc).
should be integrated into a joint new company.
Usually this implies that a new top structure is
In our interviews, more than once interviewees
Scrutinize
defined, the number of offices and production sites are
confessed that they had not done an in-depth review
rationalized, and headcount reductions are determined
of business models. Too much focus was on financials
for overlapping functions. In this way significant cost
and high level decisions on the joint business
synergies may be achieved (at least for the short term),
model. Insufficient time was spent on translating
but for revenue synergies this will usually not be
statements like ‘we will combine best of both worlds’
Integrating another company in one’s own business model is not as
enough. Simply providing sales people with brochures
into a consistent way of working in which processes,
of the other company’s products will not lead to
systems, skills, and cultures are optimally aligned.
the intended cross-selling if bonus schemes are not
In doing so, not only did they miss out on possible
adjusted, CRM and order management systems are not
revenue synergies (also see chapter Be aware), they
aligned, and different sales people approach the same
also
clients with inconsistent messages. Being commercially
models. These mismatches made the realization phase
successful together requires a sophisticated merging
a lot tougher and in some cases anticipated revenue
of all elements of both business models (business
synergies turned out to be unfeasible.
straightforward as most managers seem to think. Merging for revenue
synergy purposes means changing revenue models for both companies.
Changing revenue models affects the whole of the business model.
overlooked
mismatches
between
business
Knowing how it affects both companies is crucial for staging synergy
and making it come true. Therefore, both business models must
be scrutinized.
26
Case: incompatibility
A publishing company (PC) took over a
This difference in revenue models was
to plan and control its business appeared
small Internet company (SIC). PC has a
no subject during due diligence which
to be inappropriate for SIC’s business. A
long history in ‘traditional’ publishing and
focused on the stand-alone performance
director at PC told us that this gave a lot of
still makes most of its money by selling
of SIC. Issues only became apparent
difficulty during integration, thwarting the
subscriptions and ads. SIC however makes
when both companies were already
realization of revenue synergies.
money based on usage and projects.
merged. The traditional way PC was used
27
Solution: paying diligence due
If you want to make good decisions, you have to
For a lot of companies these are not new questions. But
do your homework. A professional due diligence
the depth in which they are answered up-front usually
phase consists of a detailed legal, financial, strategic,
is not sufficient to guarantee adequate integration.
commercial, cultural and operational review. Due to
Also, confronting revenue models of both companies
time pressure, focus usually lies on determining the
is not common practice yet. If one wants to make more
standalone value of the target and main cost saving
revenue together, one must understand the ways in
opportunities
assets
which both companies earn money. If one company
and people. Our interviews showed that this is not
makes money by advertising and the other does it by
enough. Both companies must be compared on the
selling products, you can be sure that both sales forces
different aspects of the business model, and a new
are focused on different aspects of the market. These
business model has to be designed. Can we integrate
companies must decide in advance if and how they
the commercial strategies of both businesses? How
want to align these revenue and business models.
through
rationalization
of
do we merge the management styles of both
companies? How and when do cultural differences
come into play? Which IT system do we choose?
Showcase: racing a Formula 1 car
With the take-over of a smaller by a larger
not just because of public belief. Also,
best driver will emerge automatically.”
insurance company (respectively Small
employees of Small were proud of their
According
and Large), one of the biggest challenges
label. This made repairing the false image
employees of Small quickly discovered
during the realization phase was to ‘repair’
not only necessary, but also a tough thing
they could learn a lot from employees of
the image that Small was the best pension
to do. Therefore, during the realization
Large. This made it a lot easier for them
insurer. This image was fed by the fact
phase a lot of attention was paid to
to agree to an integration of Small into the
that Small had 85% brand recognition.
presenting the facts and letting these
pension company of Large.
Therefore, public belief was that Large
facts speak for themselves. The facts
would place its pension activities under
showed that Large had a much better
Because management of Large had done
the brand of Small.. Public belief would
performance in pension insurance than
their homework and had not single-
have been correct, were it not for one
Small, in contrast to popular belief.
mindedly focused on the brand of Small,
thing: Large had organized its business a
to
this
board
member,
they knew that performing a reverse
lot better than Small had. Doing a reverse
As a former board member of Large
integration would be a foolish thing to
integration would not be a sensible move.
stated: “Give them a Formula 1 car and
do. By letting the facts speak, gut feelings
The false image had to be repaired, and
let them both race a couple of laps. The
were overcome.
28
“Give them a
Formula 1 car
and let them both
race a couple of
laps. The best
driver will emerge
automatically.”
29
Change
One cannot integrate new business without adjusting the ‘old’ company.
Issue: arrogance is taking over
The acquiring company usually decides on the
integration strategy. It is the one that paid all the
When taking over, be prepared to lose the old way of working. It is
money in the first place, so why not be the one that
calls the shots? Sounds fair and in general it is fair.
not just the acquired that lose their identity. The two companies build
However, being the one taking over and being the one
that calls the shots, should not mean you are the one
one new company together. Even with huge differences in size, both
sitting back and watching it all happen. And it should
definitely not mean you are the one sitting back and
companies will never be the same. All parties involved must be aware
looking the other way. This is often the case when
a big company takes over a small one. The acquired
of this and do something. Going back to business as usual is the best
company gets registered somewhere at the bottom of
a profit and loss statement (P&L). The business owner
remedy for synergy.
responsible for the P&L hardly notices the effect
the new acquisition has on his overall performance
“The
acquisition
just did not
move the
needle.”
and therefore loses sight of the integration of the
newcomers and the extra business they could bring.
Case: no needle movement
30
A large telecom company (Phone)
network. Unfortunately, people of Phone
M&A officer at Phone told us that this
acquired a small Internet service provider
were very busy with their own business
probably was caused by the ‘it does not
(ISP). The size difference was huge.
issues, and ISP people were forced to find
move the needle’-effect: the business
ISP had a couple dozen employees,
out how things worked on an operational
owner responsible for integrating ISP
whereas Phone has tens of thousands.
level at Phone by themselves. This caused
did not experience enough trouble or
The rationale behind the expected
integration of ISP to go slow which
pleasure from the synergy performance of
revenue synergies was the combination
made realization of revenue synergies
ISP. Had he given more of his attention
of Phone’s brand strength and network
take longer than anticipated. Lack of
to the integration process, the needle
size and ISP’s new business. The services
management attention for performance
might have moved more clearly in the
ISP had to offer would be distributed by
and progress in the integration process
right direction.
Phone’s sales people through Phone’s
made this lagging effect even bigger. An
31
Solution: get in it together
When integrating, both original companies must merge
insignificant parts of their big enterprise. In other
way of working (and how they should change it) and
into one new company. To say it with more drama:
words, companies that take over others must be willing
do whatever they can to improve business results by
both companies have to lose part of their identity and
to step aside for their new additions and make way for
cooperating with their new colleagues. It also means
way of working, and build one new way of working
them to flourish together. This means changing the
management of the acquiring company must put the
together. Even when the acquired company is not
old way of working and building a new one. Constant
performance of the acquired company at the top of
even a speck on the radar, the acquiring company
management attention for the acquired company and
the agenda of any management meeting. How far has
needs to change too, in order to reap the benefits of
positive communication about the new business and
the integration progressed? What are the main risks
the combined business.
benefits of working together are key success factors.
or reasons for suboptimal integration? Which revenue
Nowadays large companies in mature markets search
In practice this means looking at the business models of
and qualitative terms) and how can we harvest some
for new business by taking over small companies
both companies, assessing which part of the acquiring
more? Make it a point to move that needle as far
successful in that new area. If those large companies
company must be opened up to make way for the
as possible!
want to stay insignificant in that new area they
acquired (also see chapter “Scrutinize”) and actually
should ignore their new add-ons and treat them like
enforce that managers and employees change their
synergies have already been harvested (in financial
Showcase: raise the flag
A large firm wanted to integrate its Belgian
strengths of both. Just rolling out the
flag waved in front of the new Dutch
and Dutch divisions, the Belgian part
Dutch way of working into Belgium would
HQ and all Dutch postings and business
being the smallest, holding the humblest
not lead to success. Several months before
cards were replaced by Benelux ones.
employees. Headquarters for the new
day 1, the CEO had ordered a Belgian flag
The first management team meeting was
combination was to be in the Netherlands.
to be waving at the Dutch HQ on day 1
held in Belgium, and business objectives
The Belgians (and the Dutch) felt this
of the merger. The CEO’s staff thought
by country were integrated into Benelux
was not a merger of equals, but a take-
he was joking and ignored the order.
targets. Thus making it clear for all to see
over. The CEO of the new division was
Shortly before day 1, the CEO asked if the
that the smaller part of the Belgian-Dutch
convinced, however, that further growth
flag had been ordered. On hearing it was
division was just as important, and the
could only be achieved through a prudent
not, he got up and ordered it himself. On
merger would require changes on both
and balanced integration, combining the
the first day of the new division a Belgian
sides. It is not all in the big gestures.
32
The caretaker of the building
came up to my office and said:
“I don’t want to be cheeky, but
do I really have to raise the
Belgian flag in front of our
Dutch office building?”
33
Invest
“All management left the company once
it was taken over. Even with retention
bonuses they did not want to stay.”
Issue: you get what you are aiming for
For most acquirers it has become obvious that the realization of cost
synergies requires a structured integration program. Common practice
During due diligence potential cost synergies are
alone to actually plan and control the realization of
determined and quantified. Everyone understands
revenue synergies.
the importance of realizing potential cost reductions.
for realizing revenue synergies however is to just budget them by
scaling of top-line targets of responsible managers. This difference in
approach may very well be an explanation for the amount of synergies
realized. The lack of focus on revenue synergies limits the realization
That is why the total potential is usually allocated to
Our research shows that revenue synergies are usually
various projects (breakdown), with clear targets, roles
budgeted by scaling targets of P&L managers. Mostly
and governance, and reports on a structural basis
there is no clear understanding of what should
from the lowest possible levels up to the boardroom.
be done to realize this increase. The path to extra
In addition, realization of cost synergies is mostly
revenue growth is harder to define. Unlike the rather
relatively straightforward. We know what to do:
straightforward approach to realizing cost synergies, it
“We have two offices with the same activities, so we
is a combination of many things, like fine-tuning the
close one.”
proposition, training account-managers, integrating
(also see “Be brave” and “Change”). Therefore, invest time, money and
project capacity. Revenue synergies will not just come to be by simply
sales channels and so on. Where to start? Moreover,
Definition of revenue synergies however is often
responsible managers are given increased targets, but
done too late or in rather vague terms (see chapter
mostly no (temporary) increase in funds.
“Be aware”). And when they are defined in an early
making someone responsible. They must be built and monitored with
a much higher attention level than ‘normal’ business.
stage, a clear ambition level or target lacks 90% of the
This complexity hanging around the topic of revenue
time (see chapter “Be Brave”). Most companies will not
synergies results in wavering focus. It will be no
even start to think about breaking potential revenue
surprise that lack of focus on revenue synergies results
synergy areas down into a number of deliverables; let
in little success.
Case: a plan is as good as its execution
34
A telecom company (Tring) acquired a
Tring. Integration of this division into Tring
Hello’s way of working or building a team
smaller company (Hello). The acquisition
was a top priority. However, the most
consisting of Tring’s and Hello’s employees.
was well prepared and the business
important thing that was done, was that
Result: most of Hello’s wholesalers left the
models were properly scrutinized. Tring
the wholesale division was put into the
company, together with their knowledge,
was very clear about one thing: Hello’s
corporate structure of Tring. No extra
experience and performance.
wholesale division was an example for
money was invested in really copying
35
Solution: just do it
The impact on the results of common practice is
targets (the second office is closed, HR is concentrated
obvious. We know it cannot be overstated that
in one location, staff has been reduced etcetera) and
planning revenue synergies is more complex and
you can focus on your ongoing business. This does not
takes a longer breath to accomplish than to do cost
work for revenue synergies. Whenever one reaches
synergies. Nevertheless, all the necessary preparations
the revenue synergy target, the eye must still be on
can be made. You can be aware of the type of synergy
the ball. One will have to continue to motivate and
you want to pursue. You can know your clients. You
stimulate the entire workforce in order to maintain
can scrutinize the revenue and business models. You
and grow the business.
can bravely set targets. You can be willing to change.
So why not take the final step? We can say a whole
Invest in realization of revenue synergies. Revenue
lot more about this subject, but this is where it comes
synergies deserve at least the same approach as cost
down to: just do it!
synergies -- at least. At least start a proper program
with synergy breakdown and plan it together with the
And, keep doing it. After realization of cost synergies
responsible managers. At least monitor progress to
you can end the projects. You reached the defined
make sure there is champagne on the road ahead.
Showcase: planning, learning and monitoring
The
main
rationale
the
account teams were established with
were formed between sales, marketing
merger of two consumer electronics
the assignment to develop and execute
and category management. The whole
businesses was to increase top-line
key account plans. A central PMI team
process was sponsored by a senior
and margins by leveraging mutual
was set up to coordinate and assist
executive steering committee. Through
commercial networks. The business
the account teams. Trainings were
this structured and intensive approach,
case was clear, but it would not be
provided to the account teams, and
based on a combination of support
easy to achieve. Success would require
several best practice workshops were
and control, an effective learning
a clear joint approach towards shared
organized to stimulate knowledge
and professionalization process was
accounts,
exchange between the teams. A
established. Result: overperformance
between the marketing, sales and
dashboard
on the original business case.
category
functions.
progress and impact of the account
In order to get the right focus, joint
plans. So-called ‘commercial triangles’
36
and
between
strong
management
alignment
was
used
to
monitor
“Tight project monitoring
was important, but
without providing
continuous support and
new impulses it would
not have worked.”
37
Research
Method
The research was built around two
Also, the Turner Knowledge Bank
knowledge
methods:
-- built with years of experience
literature research and interviews
gathering
in the field of consulting -- was
with experienced executives and
stripped in search of useful models
managers. Academic literature was
and
used to identify state-of-the-art
best practices.
insights
on
current
and
practices on planning and realizing
revenue synergies and to structure
Interviews
further research. The interviews
made it possible to test certain
Representatives
assumptions
and
companies were interviewed. The
during literature research. Also the
companies were selected on the
interviews gave insight into how
basis of their recent participation in
‘actual people in the field’ handle
a merger where revenue synergies
their ambitions of gaining more
were to be expected. Interviewees
revenue through merging. The
were
main goal for both methods was
executive board or had a position
to define best and worst practices
close to the board during the
when trying to plan and realize
merger. For confidentiality reasons
revenue synergies after a merger.
we cannot divulge the names of
made
before
either
of
member
of
the
To give insight into the nature
of the companies and discussed
75 articles and books on the subject
synergies, we give a few specifics,
of M&A in general and revenue
without being too obvious.
synergies in specific were studied.
38
Company B
Interviewee
Synergy type
electronics
45,000 employees
electronics
15,000 employees
Corporate VP
cross-selling
shared sales skills
market power
financial
125,000 employees
bank
6,000 employees
Corporate M&A officer
with A
shared sales skills
financial
110,000 employees
financial
# of employees not
disclosed
COO with A
cross-selling
shared sales skills
market power
FMCG
3,500 employees
FMCG
700
CEO of A
shared sales skills
food
35,000 employees
multiple food companies
Corporate M&A officer
with A
cross-selling
forward vertical
integration
insurance
700 employees
insurance
800 employees
Vice president with A
product development
market power (image)
telecom
30,000 employees
internet service provider
# of employees not
disclosed
Corporate M&A officer
with A
product development
market power (image)
insurance
8,000 employees
insurance
800 employees
Board member with A
cross-selling
shared sales skills
product development
market power (general)
publishing
700 employees
internet
25 employees
Director with A
product development
market power (image)
telecom
1,000 employees
telecom
30,000
Manager Finance &
Control with A
product development
market power (image)
publishing
3,000 employees
not applicable
HR Manager
not relevant
telecom
2,000 employees
telecom
2,500 employees
Corporate PMI officer
with A
cross-selling
shared sales skills
market power
twelve
the companies or interviewees.
Literature research
Company A
39
Bezoekadres:
Huize “De Boom”
Arnhemseweg 107
3832 GK Leusden Postadres:
Postbus 228
3830 AE Leusden
T +31 (0)33 - 285 93 00
F +31 (0)33 - 285 93 01
E turner@turner.nl
www.turner.nl
40