Companies will need strong leadership if they are to achieve the savings they have targeted in recent mergers and acquisitions, warns John Colley, professor of practice at Warwick Business School.
A host of deals signed in the final two months of 2015, including Dow Chemical’s merger with DuPont, Pfizer’s $160bn purchase of Allergan, and the £71bn tie-up between brewers AB InBev and SAB Miller, made it a record year for M&A. Analysts Dealogic estimate that total value reached $5trn in 2015.
Deloitte says synergies and cost savings on these deals could be worth 3-4% of total value. “Publicly announced synergies are often lower than what management privately expect and this will be a conservative estimate for the synergies that are ultimately delivered,” suggests Angus Knowles-Cutler, Deloitte vice chairman.
Dow and DuPont estimate they can save $4bn a year. Pfizer disappointed analysts by forecasting only $2bn, compared with an expected $4bn. The two brewers believe a fifth of their anticipated £1.4bn savings will be made through procurement and engineering.
The reality can be somewhat different, with 60-80% of deals failing to deliver on their expected return, according to Colley at Warwick Business School. The most common mistake is a lack of clear leadership: “Look at Daimler and Chrysler… There was a massive clash in culture. When implementing a merger, leadership of the acquired business is usually lost, or alternatively they end up resisting change. New leadership needs to be available to ensure planned benefits are achieved.”
He says savings figures are often unrealistic because they are overestimated to justify the price paid or because due diligence is difficult. “The team that buys the company may not be responsible for making the savings,” says Colley. “The operations team may have had little involvement in calculating savings.”
Large corporate cash reserves, low interest rates – which mean financing is cheap – and high US corporation tax will encourage more deals in 2016.